What is a chattel mortgage?

A chattel mortgage is a flexible and secured car or equipment loan tailored for business needs

What is a chattel mortgage and how do they work?

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.

The nitty-gritty

“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

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.

Why choose Savvy?

We’ve assisted hundreds of businesses by finding the best chattel mortgages tailored to their needs

Confused about chattel mortgages? Want to know more?

If you’re new to chattel mortgages for business, we answer the most common questions here
What is a chattel mortgage?

A chattel mortgage is a type of business loan, which lenders offer to asset purchases that used for business 50% or more. For example, a buying a car that will be used for business during the week and personal use on weekends would qualify for a chattel mortgage.

What are the financial advantages to chattel mortgages?

For starters, businesses can claim the GST paid on the asset, and claim interest and depreciation. You are also eligible for the instant $20,000 write-off if applicable, and fuel input tax credit for car purchases.

What is the difference between a chattel mortgage and a hire purchase?

Functionally, they are the same – you pay off an amount over time to settle the loan. The difference is where ownership lies. In a chattel mortgage, the purchaser takes ownership. In a hire purchase, the bank or lender is the owner. This makes a different for accounting for assets vs. using operating capital. Your accountant may decide one option is better for your business over the other.

What is a balloon payment?

A balloon payment, or residual value payment, is a remainder of the loan amount set aside for immediate payment at the end of a loan term. In return, your monthly repayments are lower. You can pay out the balloon, refinance the balloon, or in some cases, trade your car in if it meets certain conditions.

Do I need to put down a deposit for a chattel mortgage?

No. You can borrow 100% of the car’s value, and even cover expenses such as registration, insurance, and maintenance.

What types of goods can I buy with a chattel mortgage?

Any large asset that is used within your business over 50% of the time. Cars, heavy plant, and IT equipment are most common.

I need an unusual loan term – is this possible?

Yes, we can tailor loans ranging from 12 months up to 7 years.

I run a seasonal business, can I apply for a chattel mortgage?

Yes, we can arrange seasonal repayment plans according to your busy periods.

My business has had some financial problems in the past, can we apply for a chattel mortgage?

Yes, we help businesses with bad credit find equitable deals for chattel mortgages.

Can my company finance used cars or equipment with a chattel mortgage?

Yes, however many lenders may want to charge a higher interest rate due to the added risk and low residual value of your used car.

Find out more about how chattel mortgages work

Read our helpful guides on the ins-and-outs of chattel mortgages for business

How chattel mortgage can regulate cash flow

A chattel mortgage is a type of secured car loan, which links your obligation with your asset. Lenders are more comfortable lending to businesses, offering lower interest rates in return (compared to consumer, or unsecured, loans.) However, chattel mortgages also help you acquire cars and equipment without spending your own capital. You can finance the entire cost of the vehicle and opt to borrow more than its value. This helps you finance registration costs, insurance, maintenance, modifications (such as mobility aids or refrigeration units) and other extras you need to get up and running. You may also claim the GST back, as well as depreciation, and interest.

Chattel mortgages vs. hire purchases

According to the Australian Taxation Office, hire purchases are “represent financing arrangements which facilitate the sale and purchase of goods,” in which the hirer of the goods has an option to buy the goods outright when the loan is paid off. The critical difference between this and chattel mortgages is that the “hirer” is the owner – as in the entitlement to the car is yours from the beginning. This all comes down to accounting. A hire purchase means you are paying operating costs while chattel mortgages means you are paying ownership costs. Still confused? Ask our professional consultants for more information to help you choose which option is right for you.

Using Chattel mortgages for multiple purchases

When a business is on the move, it shouldn’t have to wait for loans to be approved over and over again. Many lenders we deal with can set up a facility for your business, in which you may make many purchases throughout a financial year. This saves you time and hassle in applying for car or equipment purchases individually. It also gives you peace of mind that you are pre-approved, and may even give you leverage in negotiating better pieces. This way you can gain access to vehicles to expand your operations immediately. The quicker you can seize upon opportunities, the more orders you can fulfil and grow. However, depending on your credit standing, there may be limits to how much you can borrow in a given financial year.

Upgrading your cars or equipment

Chattel mortgages are flexible loan arrangements, as your business can choose longer or shorter loan terms (12 months to 7 years), 100% or more finance, and balloon payments. Balloon or residual value payments can be flexible in that you can take one of three routes when you arrive at the balloon payment (due at the end of your loan term.) You can pay the lump sum and use the car, refinance the residual payment, or trade your car in for a new car, using the trade in value to settle the account. This can prove useful if your business requires new cars or vehicles to keep ahead of the competition. It is much like a lease, but with the added benefit of owning a tangible asset from the beginning.

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