If you’re a business owner or part of one looking for car finance, it’s quite likely you’ve come across a financial product called a chattel mortgage. A chattel mortgage is a loan product built specifically for commercial car purchases – cars used for business 50% of the time or more.
The explainer: Chattel mortgage
In the broadest sense, a chattel mortgage is a business car loan comprised of two parts. The chattel, and the mortgage. The chattel is your car – the asset the loan is financing. The mortgage is the loan itself – what you have to pay back. When you purchase a vehicle, the vehicle is effectively yours or your company’s property. What a financier does is place a mortgage on the vehicle, making the vehicle a security against the loan. This gives the financier or lender peace of mind that you’ll pay the loan back. The upside to this is that you will pay less in interest, as security-backed loans generally have lower interest rates. Read more about chattel mortgage features and benefits.
“Mortgages” are officially known as an ASIC-registered “fixed and floating charge.” This grants the lender (chargor) the right to gain control (possession) of the chattel in the event a client defaults (the chargee.) There’s an even more technical explanation, but that’s best left for the lawyers to pore over!
Please note that registration with ASIC does not mean chattel mortgages are subject to the same conditions as the National Consumer Credit Protection Act.
How a chattel mortgage works in practice
A chattel mortgage works much in the same way a commercial loan does – you pay back the loan in instalments on a monthly, fortnightly, weekly or otherwise arranged basis. You can choose to offset your regular repayments with a residual value or “balloon” payment. This is a lump sum set aside at the end of the loan, giving you the option to:
- Trade in your car and start a new loan using the trade-in proceeds to settle your account;
- Pay out the residual and take charge of the car free and clear, or;
- Refinance the residual value.
Why chattel mortgages are better for business
Chattel mortgages differ from consumer car loans because businesses can claim tax benefits – both up front and throughout the life of the loan. Firstly, as the purchase is a cash sale, you can claim the GST on the purchase price. You can also claim the full input tax credit. Over the life of the loan, you can claim the interest paid on your repayments. (Sometimes your lender claims this and passes on the savings to you.) You can also claim the tax breaks on depreciation up to the depreciation limit.
What’s more is lenders may be prepared to finance 100% of the vehicle’s value so you don’t have to spend your own capital or tie up cash flow. You may even be able to finance more than the car’s value to amortise insurance and other extras.