Choosing between a chattel mortgage vs lease vs hire purchase
Choosing between a chattel mortgage, a lease, or hire purchase comes down to whether you want ownership, or the option of ownership, of the asset you're financing. With a chattel mortgage, you will own the asset from the start of the finance term. With a lease, you don't own the asset during the term, but you may have the option of ownership when it ends.
Of course, whether a chattel mortgage, lease or hire purchase will be best will depend on the type of business you operate, your financial circumstances (such as whether you need access to cash flow), your tax position (for chattel mortgage GST benefits) and the type of the asset you wish to purchase.
You’ll also want to consider:
Interest and fees
How much your business will pay in interest and fees with each option
The need to upgrade
Whether you need to upgrade the asset during the term of your finance agreement
GST
The amount of GST or tax your business can claim
End of the finance term
What you would like to happen to the equipment at the end of the finance term
How to compare chattel mortgage vs lease vs hire purchase
A chattel mortgage, finance or operating lease, and commercial hire purchase (CHP) are all forms of equipment finance available to businesses in Australia. Each offers different levels of asset ownership and business tax benefits. For example, there are chattel mortgage GST benefits, and business tax deductions on lease payments.
If you want to compare a chattel mortgage with a lease and commercial hire purchase, the first consideration is what kind of asset or assets you want to acquire for your business. You can finance vehicles, equipment, or machinery for a business through these types of commercial finance, but understanding how they work will help you decide which will benefit you and your business the most.
Chattel mortgage vs lease vs commercial hire purchase comparison
Chattel mortgage
- Common use: Vehicles, machinery
- Asset value: High
- Asset lifespan: Long-term
- Asset ownership: Full ownership from the start
Finance lease
- Common use: Large machiner, medical equipment
- Asset value: High
- Asset lifespan: Long-term
- Asset ownership: Ownership benefits with option of full actual ownership at the end of the term
Operating lease
- Common use: IT equipment, telco equipment
- Asset value: Low
- Asset lifespan: Short-term
- Asset ownership: No ownership
Commercial hire purchase
- Common use: Tools, equipment, vehicles
- Asset value: Medium
- Asset lifespan: Medium-term
- Asset ownership: Ownership at the end of the agreement
Chattel mortgage advantages
A chattel mortgage gives a business full ownership of the assets funded by a lender. Generally, chattel mortgage interest rates will be competitive as the assets you purchase will act as security on the loan.
A business can also claim the initial GST amount of the asset’s purchase price when using a chattel mortgage. You can use our chattel mortgage calculator to estimate how much your regular repayments and total costs will be.
A balloon payment on a chattel mortgage can help reduce the agreed repayment amount, freeing up business cash flow.
Chattel mortgage GST benefits
Once a chattel mortgage is established through a lender, a business can claim the GST on the initial purchase price of the vehicle as an input tax credit on its next Business Activity Statement (BAS). To do so, your business will need to be registered for GST on a cash basis — i.e. your business records income and expenses when they occur.
The maximum amount of GST you can claim on an asset is 1/11th of the cost limit set each year by Australian Tax Office.
Types of Lease available to Australian businesses
There are three main types of business lease in Australia: a finance lease, an operating lease and a novated lease. To decide which type of lease may best suit your business needs, it’s important to understand the distinctions between the two and what they are commonly used for:
- Finance lease — A mid-to-long-term lease used for high-value purchases — such as medical equipment, and your business will take on both the risks and benefits of owning the asset.
- Operating lease — A short-to-mid-term lease used for assets which may become quickly obsolete — such as computers and IT equipment — and the lender will take on both the risks and benefits of ownership.
- Novated lease – A tax-efficient way for business to allow employees to finance a vehicle and its running costs. The vehicle can be used by the employee 100% for personal use.
Finance lease advantages
The main advantage of a finance lease is low interest rates in comparison to other types of equipment finance. Your business will have both the use of business equipment and the benefits of ownership.
However, the lender will have actual ownership of the asset, which means there is very low risk to the lender. You generally have the option to take ownership of the asset by making a final 'balloon payment' to the lender. You may also be able to claim tax on your finance lease payments.
Operating lease advantages
The main benefit of an operating lease is that your business can commonly upgrade the assets purchased within the lease period.
This is highly beneficial for businesses purchasing IT equipment, as these types of assets often become obsolete within a few years. Your business can also claim tax on your rental payments.
The cost of any maintenance required fro the asset during the operating lease term will be included in your lease payments.
Commercial hire purchase (CHP) advantages
The main benefit of a commercial hire purchase is that your business will own the asset at the end of your agreement. Your business will benefit from not needing to purchase the asset outright, which frees up cash flow on medium-value assets such as office furniture or power tools.
For this reason, hospitality businesses often use hire purchase agreements to finance commercial kitchen equipment.
Common businesses choosing chattel mortgage vs lease vs hire purchase
Hospitality — Restaurants and Cafes
- Chattel mortgage: Fit-outs, company cars
- Finance lease: Brewery equipment
- Operating lease: IT and payment systems
- Hire purchase: Commercial kitchen equipment
Construction and Mining
- Chattel mortgage: High-value equipment
- Finance lease: High-value equipment
- Operating lease: Low-value equipment
- Hire purchase: Mid-value equipment
Medical
- Chattel mortgage: Fit-outs, company cars
- Finance lease: Medical equipment
- Operating lease: IT and payment systems
- Hire purchase: Office furniture
Retail
- Chattel mortgage: Fit-outs, company cars
- Finance lease: Not often used
- Operating lease: IT and payment systems
- Hire purchase: Store furniture
Tradespeople
- Chattel mortgage: Vehicles
- Finance lease: High-value tools
- Operating lease: Low-value tools
- Hire purchase: Mid-value tools
Manufacturing
- Chattel mortgage: Manufacturing equipment
- Finance lease: Manufacturing equipment
- Operating lease: Not often used
- Hire purchase: Not often used
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