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Asset Financing – Chattel Mortgages explained



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A Chattel Mortgage is a popular choice for business owners seeking finance to purchase cars, vehicles, or equipment. It refers to a business loan where the acquired asset serves as security against the loan. Some lenders may also refer to it as an equipment loan.

How does a Chattel Mortgage work? When opting for a Chattel Mortgage, the lender offers a loan to purchase a vehicle. While the vehicle or equipment is owned by the business, it acts as collateral for the loan, providing assurance to the lender. This setup is similar to a fixed-rate traditional home loan or mortgage.

Chattel mortgages differ from other forms of asset finance, such as hire purchase or financial lease, in several ways. In a hire purchase, the car or equipment is rented from the lender, with regular installments eventually leading to ownership. With a financial lease, the financier remains the owner, while the borrower has the option to purchase the asset for an additional price. In contrast, a Chattel Mortgage results in complete ownership of the vehicle or equipment once the loan is fully repaid.


Benefits of a Chattel Mortgage for businesses

Chattel Mortgages offer several advantages, including:

  • Generally lower interest rates compared to unsecured loans like consumer car loans.
  • Immediate ownership from the start, making it both an asset and liability for the business.
  • Potential tax deductions on interest and depreciation associated with the mortgage.
  • Flexible and structured repayments tailored to suit the business’s cash flow.
  • Option to set a balloon payment at the end of the term, allowing lower monthly repayments.
  • Repayment terms spanning two to five years, offering flexibility.


Chattel Mortgage vs. Hire Purchase

With a Chattel Mortgage, the business retains full ownership of the vehicle or equipment, whereas hire purchase involves leasing the asset from a lender for a fixed term, without immediate ownership. However, ownership may be transferred at the end of the loan term in a hire purchase arrangement. It’s important to consider tax implications and choose the option that aligns best with your specific circumstances.

Tax benefits of a Chattel Mortgage: Acquiring a vehicle or equipment through a Chattel Mortgage may entail tax benefits, such as the ability to:

  • Claim interest payments as deductions in the annual income tax return if used for business purposes.
  • Claim depreciation value as a tax deduction, considering the asset’s business use.
  • Reclaim GST credit on business cars, vehicles, or equipment used for commercial purposes. It is advisable to seek independent tax advice for personalized guidance.

Understanding balloon payments: Balloon payments are one-time, larger payments made at the end of the loan term. They are called “balloon” due to their significant size compared to regular payments throughout the loan duration. One of the main advantages of a balloon payment is that it lowers monthly repayments, helping businesses manage cash flow for daily expenses. However, it’s crucial to ensure the balloon payment is manageable and won’t adversely affect your finances.

Our vehicle and equipment finance solution: At VLS, we also provide business car, vehicle, and equipment loans. Similar to a Chattel Mortgage, this solution enables the purchase of assets without an upfront deposit, allowing businesses to retain their funds. Typically, the asset itself serves as the primary security. This option may be suitable if:

  • The business possesses a valid Australian Business Number (ABN).
  • The product will primarily be used for business purposes.

If you’re uncertain whether this finance option is right for you or your clients, feel free to reach out to us, and we can guide you through the process.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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