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What is a chattel mortgage?

A chattel mortgage is a type of loan used by businesses to purchase new and used vehicles or other business-related equipment. In many ways, the chattel mortgage is simply an improved version of what was known for years as commercial hire purchase (CHP).

How a chattel mortgage works

A chattel mortgage is essentially a mortgage over goods to be financed. Vehicles and equipment financed through a chattel mortgage are classed as a cash sale in that the goods automatically become yours on purchase and the finance company takes a mortgage over those chattels.

For tax purposes, you can claim the asset’s depreciation and the interest paid on your loan as an expense to offset your business income. A chattel mortgage also allows businesses to immediately claim the full input tax credit on the GST applicable to those assets on their next Business Activity Statement (BAS).

Structuring a chattel mortgage

The chattel mortgage is a very flexible finance option. It gives you the ability to either finance the purchase price in full (often including GST) or include an upfront deposit or trade-in to reduce your monthly instalments.

A residual payment (known as a balloon payment for chattel mortgages) may also be placed at the end of the term to represent the equipment’s end value. This can reduce the monthly repayments, which benefits cash flow.

Alternatively, you may choose to structure your chattel mortgage by completely paying down the debt in full over the term of your agreement (a fully amortized loan).

What can a chattel mortgage be used to purchase?

A chattel mortgage can be used to purchase items such as machinery and vehicles, which are large assets with a service life of several years or more.

Benefits of a chattel mortgage

The chattel mortgage has gained substantial popularity with small to medium businesses since the implementation of the GST and accelerated depreciation, as it typically offers more tax-deductibility than finance leases (where only the monthly finance payment is deductible).

Businesses registered for GST can claim the entire upfront GST cost of the asset as an imputation taxation credit (ITC) in their next BAS submission, provided the asset is for business use.

A c hattel mortgage is also ideal for smaller businesses under the simplified tax system (STS) with less than $10m in turnover. These businesses can pool mortgaged assets and claim the one depreciation rate of 15% in the first year, and 30% diminishing value after that, no matter what type of asset is being financed.

Key features of a chattel mortgage

  • Up to 100% financing (including GST if desired).
  • Businesses registered for GST can claim 100% of the input tax credit in the business activity statement (BAS) following purchase.
  • Businesses take full ownership of the equipment – the equipment is simply used as security for the loan.
  • Payments may be structured either monthly in advance or in arrears (commencing 30 days after the loan settles).
  • Finance term usually up to 5 years.
  • Payments and interest are fixed for the life of the transaction.
  • Available for new or used equipment (including private sales).
  • GST is not applicable on monthly instalments or the final balloon.
  • Any balloon payment may be structured to lower monthly repayments and can be refinanced over a 2 nd term after the conclusion of the initial loan.

Looking to finance via a chattel mortgage?

Use our chattel mortgage calculator to calculate your estimated payments, or speak to our expert team to discover the financing options that are right for you.

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