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What is a Chattel Mortgage?
A loan to purchase business assets like vehicles or equipment, with the asset as collateral. -
Eligible Purchases:
Work vehicles, machinery, or specialised business equipment. -
Tax Benefits:
Interest, GST, and depreciation can often be claimed as tax deductions. -
Loan Terms:
Typically 12 months to 7 years, with flexible repayments. -
Ownership After Repayment:
Once paid off, the business owns the asset and can keep, sell, or trade it. -
Pros and Cons:
Benefits include lower rates and tax deductions; risks include negative equity, balloon payments, and potential asset repossession.
If you’re an Australian business operator looking at your best finance options to upgrade the work car or equipment, a chattel mortgage may be for you. Chattel mortgages are the most common form of loan that businesses can leverage to purchase necessary equipment for their operations and take their business to the next level.
In this piece, we’ll be laying out exactly what a chattel mortgage is, as well as the pros and cons and cover what you need to know before applying, to ensure it's the right fit for you.
What is a Chattel Mortgage?
To keep things as simple as possible, a chattel mortgage is a French term for a business loan used to purchase a piece of machinery, equipment or a work vehicle. It’s a fancy way of saying loan for your business vehicle or machinery.
The term ‘chattel’ stems from the concept of a ‘movable asset’ for a business, best represented by a work ute, truck or van, as well as any equipment and machinery used to keep the business ticking along. This movable asset, for example, a delivery company’s cargo van or a tractor for the farm, is used as a form of collateral for the loan.
What Can a Chattel Mortgage be Used to Purchase?
There’s quite a range of machines that fit under the chattel mortgage umbrella. So long as it’s used for business purposes:
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Aussie businesses can use a chattel mortgage to purchase anything from a car, motorcycle, ute or cargo vans, which all fall under the first tier.
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Tier two equipment represents larger vehicles, like buses, caravans, trucks and trailers, as well as machinery like, diggers, excavators, mowers and tractors with a chattel mortgage.
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Tier three machinery covers things like a warehouse’s forklifts, manufacturing equipment and even office and IT equipment.
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Tier four items covered by a chattel mortgage include more specialist gear like security systems, gym equipment or costly appliances in a large, commercial kitchen.
How Does a Chattel Mortgage Work?
If you’re familiar with car loans, chattel mortgages essentially work in a similar fashion.
Chattel mortgages are commonly used by sole traders and small business operators to upgrade their equipment, and they work in a straightforward manner. When a business operator needs a new work vehicle, they contact a financial lender and outline how much they’d like to borrow.
Once all the requisite paperwork is taken care of, the business can purchase that vehicle or equipment with the funds provided by the lender. The loan uses that vehicle or equipment as a form of collateral for the loan, in much the same way as a secured car loan is registered with the Personal Property Securities Register (PPSR) - though a chattel loan only applies to business purchases.
In return for the provided funds, the business agrees to pay the lender both the borrowed amount, as well as interest that has accumulated over time and any other establishment fees that may apply.
Loan Length
Typically, a chattel mortgage term can span anywhere between 12 months, up to seven years. However there could be differences between lenders. While your repayments are higher on shorter terms, you’ll pay less interest because the loan isn’t stretched out as long.
Tax Advantages
Chattel mortgages have proven to be one of the most popular avenues for Aussie businesses to upgrade work-related equipment because of a range of tax advantages.
That’s because the interest paid on a chattel mortgage, as well as the GST paid and depreciation on the asset can often be claimed as a tax deduction.
Balloon Payments
A balloon payment is a lump sum payable at the end of the loan term; it serves to reduce regular repayments. Businesses are given the option of chipping away at the balloon payment, allowing you to reduce your monthly repayments, offering more flexibility than a standard car or equipment loan.
What Happens At the End of a Chattel Mortgage?
After your chattel mortgage is paid in full, including the remaining balloon payment, you and/or your business are the legal owner of that vehicle or piece of equipment and you’re free to do whatever you’d like with it.
The mortgage for that vehicle or equipment is removed from the Personal Property Securities Register (PPSR) and you’re able to continue using it, sell it for cash or trade it in for another upgrade.
Chattel Mortgage Pros
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As a secured loan, chattel mortgage rates are often more favourable than an unsecured business loan.
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The business can claim ownership of that asset, which can be used on its balance sheets.
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In some cases, no deposit is needed to successfully apply for a chattel mortgage, depending on the lender.
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Claiming GST on their next Business Activity Statement (BAS), with the ability to claim depreciation and a portion of your interest payments as a tax deduction, even an input tax credit, if applicable.
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Chattel mortgages often offer flexible repayment terms with adjustment payment schedules that align with your busy and quiet times of the year. You can also opt-in to balloon payments to reduce your monthly payments.
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Fixed interest rates and a predetermined payment cycle provide business operators with a clear forecast for budgeting purposes.
Chattel Mortgage Cons
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Only a portion of the vehicle or equipment’s depreciation, as well as your interest payments and operating costs can be claimed as a tax deduction, as opposed to the entirety of the loan in a novated lease.
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Balloon payments could equate to more interest ultimately payable as you’re technically carrying forward a loan balance. In some cases, you may need to refinance the balloon amount if you can’t afford to pay it.
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There are inherent risks with a secured loan, namely in the case of a chattel mortgage, the risk of repossession of that asset if you fail to meet your repayment obligations, which can result in a hit to your business’ credit rating.
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Depreciation on a new vehicle is particularly aggressive in the first 12 to 36 months, with the potential of the loan balance exceeding that of the asset’s market value. This is called negative equity and could be bad if you need to sell during that time.
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Chattel mortgages are not regulated by the National Consumer Credit Protection Act (NCCPA), meaning due diligence in choosing a reputable lender can go a long way.
What You Need to Apply for a Chattel Mortgage
In order to qualify for a chattel mortgage, you’ll need to provide financial lenders with some key details and meet some specific criteria, including:
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Using the vehicle for business at least 51% of the time
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Provide your active ABN or ACN
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Proof of identity and residency status
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Proof of GST registration with at least 6 - 12 months' history, preferably five years
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Information on the vehicle or machinery you’d like to purchase
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Provide financial statements that prove your ability to repay the loan on time
Image Credit: Anton Kudryashov via Pexels
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