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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 one of the most common forms of loans that businesses can use to purchase necessary equipment for their operations and take their business to the next level. But what are they?
What is a Chattel Mortgage?
A chattel mortgage is a type of business loan used to purchase a piece of machinery, equipment or a work vehicle.
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 running. 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.
Under this arrangement, the lender takes a mortgage or security interest over the asset until the loan is repaid. Once the loan is fully paid off, the lender's security is removed and the business gets clear ownership.
What Can You Buy With a Chattel Mortgage in Australia?
There is a wide range of movable assets that fall under the chattel mortgage umbrella. So long as it will be used mainly for business purposes (more than 50%):
Standard vehicles
Aussie businesses can use a chattel mortgage to purchase vehicles such as cars, motorcycles, utes or cargo vans, which all fall under the first tier.
Larger vehicles
Tier two equipment represents larger vehicles, like buses, caravans, trucks and trailers, as well as construction and agricultural equipment such as diggers, excavators, mowers and tractors.
Manufacturing and tech equipment
Tier three machinery covers things like a warehouse's forklifts, manufacturing equipment and even IT equipment like servers, computers and networking gear, as well as office assets such as printers, copiers and phone systems.
Specialised business assets
Tier four items covered by a chattel mortgage include more specialist gear like medical or dental equipment, fitness equipment for gyms, and hospitality assets or costly appliances in a large, commercial kitchen.
How Does a Chattel Mortgage Work?
Chattel mortgages are commonly used by sole traders and small business operators to upgrade their equipment. It combines immediate access to an asset with the lender's right to secure the loan against said asset. Here's how it works:
1. Apply for finance
When a business operator needs a new work vehicle, they contact a financial lender and outline how much they'd like to borrow. The lender then assesses the business's eligibility, business activity statements (BAS), creditworthiness, financial history, and business use of the asset.
2. Ownership at purchase
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 business takes ownership of the asset from day one. Unlike a lease, the borrower, not the lender, is listed as the owner.
3. Lender registers the mortgage
A mortgage on the vehicle or equipment will be registered by the lender in the Personal Property Securities Register (PPSR). This gives the lender rights to repossess the asset if the business defaults on repayments.
4. Loan repayments
In return for the provided funds, the business agrees to pay the lender both the borrowed amount as well as interest and any other fees that may apply over an agreed term. Some agreements may include a balloon payment at the end.
5. Loan finalisation
Once all repayments (including any balloon payment, if applicable) are made, the lender removes the mortgage from the PPSR, and you and/or your business are the legal owner of that vehicle or piece of equipment, and are free to do whatever you'd like with it.
What You Need to Apply for a Chattel Mortgage
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
What's the Difference Between a Chattel Mortgage and a Standard Car Loan?
Choosing whether to use a chattel mortgage or a standard car loan when purchasing a vehicle largely depends on the purpose it will serve. A chattel mortgage is structured for businesses that want to own a variety of assets, whereas car loans are primarily designed for standard vehicles mostly for personal use.
|
Feature |
Chattel Mortgage |
Standard Car Loan |
|
Primary use |
Business (>50%) |
Mostly personal |
|
Ownership |
Business owns the asset |
Individual owns the asset |
|
Loan term |
1-7 years |
1-7 years |
|
Tax benefits |
GST, depreciation, interest reductions |
None (unless partial business use) |
|
Balloon payment |
Common |
Less common |
|
Best suited for |
SMEs, sole traders, companies |
Individuals |
Purpose and eligibility
To be eligible for a chattel mortgage, the vehicle or equipment you intend to purchase must be used more than 50% for business purposes. If you're seeking funds to buy a car for everyday personal use, you most likely need to apply for a standard car loan instead.
Here are some car loan options you may consider:
Ownership and structure
When you use a chattel mortgage to purchase a vehicle, your business owns the asset upfront. It goes on the balance sheet immediately, unlike leasing, where the financier owns it. Similar to a car loan, the borrower is the legal owner of the car from day one.
With both financing, the lender holds and registers a security interest over the asset, which means they can repossess it if you fail to meet your repayments.
However, unlike car loans, where borrowers benefit from consumer protections, a chattel mortgage is treated as a business finance or commercial agreement, and you do not have the safety net of consumer protections.
This can include provisions like consumer hardship arrangements, and even things like displaying a comparison rate that indicates the true cost of the loan when fees are taken into account.
Loan Length
Like a standard car loan, a chattel mortgage term can span anywhere between one to seven years. This varies by lender. While your repayments are higher on shorter terms, you'll pay less interest because the loan isn't stretched out as long.
See Also: InfoChoice Car Loan Calculator
Tax Advantages
Chattel mortgages are 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 (if GST-registered) and depreciation on the asset, can often be claimed as a tax deduction.
With a personal car loan, most borrowers get no tax benefits, unless the car is partly used for business. Say, you're a sole trader, you may claim a portion of running costs (fuel, servicing, insurance) and loan interest, but you must be able to prove it with a logbook or cents-per-km record.
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.
A chattel mortgage can be used to fund the purchase of a wide range of vehicles.
Pros of a Chattel Mortgage
Immediate ownership
The business owns the asset outright, which can be used on its balance sheets.
Lower interest rates
As a secured loan, chattel mortgage rates are often more favourable than an unsecured business loan.
Tax benefits
Claim GST on your 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.
Flexible repayments
Chattel mortgages often offer flexible repayment terms with adjustable payment schedules that align with your busy and quiet times of the year. You can also opt for balloon payments to reduce your monthly repayments.
Versatility of use
Funds from a chattel mortgage can be used for a wide range of movable assets: cars, vans, trucks, machinery, medical equipment, IT assets, etc.
Predictability
Fixed interest rates, which are common with chattel mortgages, and a predetermined payment cycle provide business operators with a clear forecast for budgeting purposes.
Cons of a Chattel Mortgage
Limited to business use
The asset must be used mainly for business purposes, meaning it is not suitable for personal car buyers, unless they operate as sole traders.
Repossession risk
Because the lender holds a security interest over the asset, they can repossess it if you fail to meet your repayment obligations. This can result in a hit to your business's credit rating.
Depreciation
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.
Higher total cost
While balloon payments lower regular instalments, this payment structure 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.
Fewer consumer protections
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 since you don't have access to the same legal protections as consumer borrowers.
Photos by Anton Kudryashov and Tima Miroshnichenko on Pexels
