What is a Chattel Mortgage?
A chattel mortgage is a type of finance used by sole traders and businesses predominantly for the purchase of a vehicle, often due to the significant financial advantages it offers over a standard car loan. To qualify for a chattel mortgage, the vehicle must be used at least 51% of the time for business.
In this chattel mortgage guide, you’ll learn:
- How a chattel mortgage works
- Who can apply for a chattel mortgage
- The documentation you will need to apply
- The tax advantages to a chattel mortgage
- How to compare lenders and loan terms
- The types of assets you can purchase with a chattel mortgage
How does a Chattel Mortgage work?
Chattel mortgages are a fixed-term finance contract with a fixed interest rate, most similar to secured car loans but for business customers. This means the vehicle or vehicles you purchase will still act as security for the loan, but your business can immediately take advantage of the tax benefits of ownership.
If you are approved for a chattel mortgage:
- A lender will provide the funding needed to purchase the vehicle.
- You will purchase the vehicle and take full ownership and responsibility.
- You will make regular repayments to the lender for a fixed period of time.
- The lender will register a mortgage over the asset.
Chattel mortgages are required to be registered similar to how a lender secures a home loan by registering the mortgage on a property.
As the asset will be secured, the interest rate you pay on a chattel mortgage will be lower than most other forms of business finance.
Under this arrangement, you or your business will own the vehicle and assume full responsibility for it as an asset. You will also be responsible for the vehicle’s operating expenses for the duration of your chattel mortgage term, including:
- Servicing costs
- Replacement tyres
Who offers a Chattel Mortgage?
Most banks will offer a chattel mortgage for businesses. Otherwise, you could choose to apply for a chattel mortgage with:
- Non-Bank Lenders
- Specialist Asset Finance Lenders
- Finance Brokers
Specialist Asset Finance lenders offer a streamlined application process, making them an appealing option for a chattel mortgage.
Who can get a Chattel Mortgage?
Anyone who owns or runs a business can apply for a chattel mortgage, provided the vehicles they intend to purchase will be used within the business at least 51% of the time. This makes a chattel mortgage ideal for tradies and other business owners who want to finance a vehicle primarily for work, but still drive it around on the weekend as well.
As a chattel mortgage is specifically designed for businesses, you can apply for a chattel mortgage if you’re:
- A sole trader - i.e. tradie - financing a vehicle predominantly for business use
- Self-employed and an ABN holder
- Financing a company car or fleet as a business asset
- Financing industrial vehicles or machinery for business use.
Lender approval criteria will vary, though provided you can supply the appropriate documents and have a good credit history, you’ll likely be approved.
What do I need to apply for a Chattel Mortgage?
If you’re buying a vehicle to the value of $150,000, most lenders will offer a chattel mortgage if you:
- Have been in business 12 months; and
- Have an ABN; and
- Are registered for GST; and
- Have a clean credit history
- Are currently renting and can provide a 20% deposit; or
- Own a home.
If you’re looking to finance a vehicle greater than $150,000, or have been in business less than 12 months, you’ll need to apply for a chattel mortgage through the standard loan application process.
If this is the case, you’ll need to provide additional documentation to the lender so they can better assess your application. Here are some tips to improve your chances of getting approved.
- Demonstrate the ability to service your equipment loan or lease.
- Meet the lender’s criteria, such as:
- An ABN and GST registration
- An acceptable credit rating
- A minimum level of turnover
- A maximum level of other debt.
- Supply all your supporting documents, such as:
- Proof of identity
- Financial records (provided by your accountant)
- Profit and Loss Statements
- Balance Sheet
- Details of the asset you wish to purchase
- Business bank statements.
- Rates notice (if you own a home).
- Rental agreement (if you are renting).
If you are self-employed and an ABN holder, you can still apply for a chattel mortgage. You can read more about self-employed applications in our guide on Low Doc Business Loans.
You should always research a specific lender’s criteria before applying, and compare lenders to find the best rates and lowest fees on a chattel mortgage.
What are the tax advantages to a Chattel Mortgage?
If your business is registered for GST on a cash basis - i.e. it records business income and expenses as and when they occur - it can claim the GST on the initial purchase price of the vehicle as an input tax credit on the first Business Activity Statement (BAS) following the establishment of the chattel mortgage.
If you'd like to find out if the tax benefits on a chattel mortgage are more suitable for your business than other forms of equipment finance, you can use our guide to quickly compare a chattel mortgage vs lease vs hire purchase.
If you’re taking out a chattel mortgage:
- The vehicle becomes an asset on the business’s balance sheet
- You can claim the initial purchase-price GST back on your next BAS
- You can claim depreciation on the vehicle in your tax return
- A balloon payment can help reduce your repayment amounts and maintain business cash flow
- All interest is tax deductible
In the case of depreciation, there is a maximum amount for vehicles, which is set each year by the Australian Tax Office. As of March, 2019, the cost limit on vehicles is $57,581 for both GST and depreciation. The maximum amount of GST claimable is 1/11th of the cost limit - currently $5,234.
Chattel Mortgage Vehicle Price versus Claimable GST Table
|Vehicle One||Vehicle two||Vehicle three|
|Reason||Vehicle below cost limit, full GST on the purchase price can be claimed||Vehicle is above the cost limit, only $5,234 of GST can be claimed||Vehicle is above the cost limit, only $5,234 of GST can be claimed|
Check the eligibility of your business to make these kinds of deductible claims under a chattel mortgage with your accountant or other trusted financial adviser before entering into a finance agreement.
Chattel Mortgages for sole traders
For sole traders, a chattel mortgage can provide significant benefits not available under most other forms of car finance. As the vehicle is being used largely for business purposes, you may be able to claim some or all of the interest and depreciation costs as tax deductions as well.
Common Australian Trades for a Chattel Mortgage
|Tradies A - E||Tradies F - L||Tradies M - Z|
Most Common Vehicles Purchased With Chattel Mortgage
|Small Vehicles||Large Vehicles||Machinery|
Chattel mortgages are commonly used by companies looking to purchase heavy machinery - such as transport truck and trailer combos, delivery trucks, excavation machinery, and other mining equipment.
A chattel mortgage will often provide better rates for sole traders than other forms of vehicle finance, such as unsecured personal loans.
What is a balloon payment on a chattel mortgage?
Balloon or ‘residual’ amounts are essentially lump-sum repayments due at the end of the loan term. Chattel mortgages can be set up to include a balloon amount, which results in lower scheduled repayments at the cost of a higher final payment.
This is often the case when a business wants to conserve cash flow at the time of taking on the chattel mortgage. Otherwise, the business may choose to pay off the vehicle without a balloon and simply own the vehicle once the loan is repaid.
You can use the Chattel Mortgage Calculator to quickly compare repayments and balloon payment amounts.
Chattel Mortgage Balloon Payment Calculation Table
|Loan Type||Loan Amount||Loan Term||Balloon Amount||Interest rate||Monthly Repayments|
|Chattel Mortgage||$50,000||5 years||$0||6%||$966.64|
|Chattel Mortgage||$50,000||5 years||$20,000||6%||$679.98|
Important: This is a hypothetical calculation as an illustration of how balloon payments affect monthly repayment amounts.
Chattel Mortgage Fees
Chattel mortgages typically attract lower interest rates and fees than some alternative forms of car finance, such as unsecured personal loans. Just like many car finance agreements, the rate for a chattel mortgage is typically fixed for the term of the loan.
You can read our guide to learn more about chattel mortgage interest rates in Australia.
A fixed-term interest rate means any changes to lender rates during the loan period will not affect your repayments, or business cash flow.
What is the term on a Chattel Mortgage?
Loan terms for chattel mortgages are often flexible to suit the borrower, though most lenders will offer a chattel mortgage agreement between two and five years.
Chattel Mortgage Minimum and Maximum Terms
|Product||Minimum Term||Maximum Term|
|Chattel Mortgage||2 years||5 years|
In some cases it’s also possible to borrow more than 100 per cent of the vehicle’s up-front cost. This means you can potentially include any associated costs, such as vehicle vinyl wraps and registration.
Do I need to pay a deposit on a chattel mortgage?
Although you won’t be required to put down a deposit in most cases - and lenders will generally finance 100% of the asset price through a chattel mortgage - you can certainly place down a deposit to lower your monthly repayments if you wish to.
If you have an existing vehicle you will be trading in, you can use the trade value of your old vehicle to purchase the new vehicle, which will also reduce the amount borrowed and, therefore, your monthly payments.
What happens at the end of my chattel mortgage term?
At the end of a chattel mortgage, you or your business will need to pay the balloon payment - if there is one - and you will have a few options.
- Trade the vehicle in and purchase another with a new finance agreement, repaying the balloon amount in the process (generally using the proceeds from the trade-in).
- Repay the balloon with funds at hand, and retain or sell the vehicle independently.
- Refinance the balloon amount and retain the vehicle.
At the end of the term, you can refinance the balloon amount as a standard car loan and use the vehicle for personal use 100% of the time.
Chattel Mortgage Summary
Chattel mortgages in Australia offer greater benefits for businesses than many other kinds of finance, and is suitable for all kinds of businesses wishing to purchase company vehicles or machinery.
In summary, a chattel mortgage:
- Allows a business to finance a vehicle if it is used for business purposes 51% of the time.
- Uses the financed vehicle as security.
- Allows the business to benefit from ownership of the vehicle immediately.
- May include a balloon payment to lower monthly repayment costs.
- Is generally set between 2 - 5 years.
- Generally has lower rates and fees than other forms of vehicle finance.
- May include early repayment or termination fees.
Chattel Mortgage Pros and Cons
Chattel Mortgage FAQ
Can I get a Chattel Mortgage if I have bad credit?
Yes, provided you can display your ability to repay the loan amount. As a chattel mortgage uses the vehicle you wish to finance as security, lenders are more inclined to offer a chattel mortgage to someone with bad credit than they are an unsecured business loan.
What type of fees can I expect to pay on a Chattel Mortgage?
Chattel mortgages are often free of some of the types of fees and charges often associated with consumer loans and other finance agreements - such as account-keeping fees and other charges. Make sure you understand any fees on a chattel mortgage before signing an agreement with a lender.
Can I finance used cars with a Chattel Mortgage?
You can use a chattel mortgage to finance used cars or vehicles for your business. However, be aware that lenders may charge a higher interest rate if you are planning to buy used cars or vehicles, due to the added risk and lower value of the used asset
What are the disadvantages of a Chattel Mortgage?
There are three main disadvantages of a Chattel Mortgage:
- All monthly instalments (and the balloon payment) are not tax-deductible
- A business is paying interest on a vehicle instead of owning it outright
- For small businesses in particular, there is experienced accounting work required to claim GST