Chattel Mortgages Explained (Pros & Cons)

Need a chattel mortgage for your business. We’ll help you understand how they work and compare your options.

What is a chattel mortgage?

A chattel mortgage is a secured business loan used by businesses and sole traders to finance business equipment, most often a car or commercial vehicle. To qualify, the financed vehicle must be used for business purposes at least 51% of the time.

Here are some of the key characteristics of a chattel mortgage:

Secured finance

With a chattel mortgage, the asset being financed is used to secure the loan (the asset is the chattel, the mortgage is the loan agreement). This means chattel mortgage interest rates are generally lower than unsecured finance.

Can finance any type of equipment

Generally, as long as it’s an asset with a unique identification number (e.g. a vehicle identification number), it can be financed with a chattel mortgage.

Fixed term

A chattel mortgage is a fixed-term finance contract with terms of between 1 - 7 years typically available.

Flexible repayments

Chattel mortgages can be repaid weekly, fortnightly or monthly to match your business cashflow, usually with the option to have a balloon payment (lump sum) at the end of the term.

How does a chattel mortgage work?

Chattel mortgages work in a similar way to other types of vehicle or asset finance, but are always secured by the asset being purchased and are only used by businesses. They are a fixed-term and usually fixed-rate finance contract, with loan amounts of up to $2 million available, depending on the lender.

Once the lender has approved a chattel mortgage application:

The business will purchase the asset and gain immediate, full ownership.
The business will make regular repayments to the lender throughout the term.

As the business takes immediate ownership of the asset, it will also assume full responsibility for insuring it and covering operating expenses, such as registration, servicing costs and fuel.

If you need finance to cover the ongoing costs, a business line of credit may be suitable.

Who uses a chattel mortgage?

Chattel mortgages are popular with sole traders and businesses. Essentially, anyone planning to finance a business vehicle or other asset predominantly for business purposes may be eligible.

They are especially popular with tradies, as the vehicle can double as a personal vehicle outside its primary use for their business, although the asset must be used for business purposes more than half the time.

Around 1 in 3 business loan requests received by Lend (34%) are for a secured finance arrangement such as a chattel mortgage, with small businesses requesting an average loan amount of $81,566. Construction & Trades, Professional Services and Transport are the sectors that most commonly request secured asset finance.

Pros and cons of a chattel mortgage

Benefits of a chattel mortgage

• Asset ownership
With a chattel mortgage, you gain immediate ownership of the vehicle. This allows eligible businesses to claim depreciation on the value of the vehicle as a business expense.
• Low interest rates
Interest rates on chattel mortgages are generally lower than the rates available in unsecured business loans and other finance options such as a line of credit.
• Balloon payment option
You generally have the option to include a balloon payment (a large one-off payment at the end of the loan term), which reduces your ongoing repayments.
• Tax benefits
Any interest and fees paid on a chattel mortgage may be tax deductible. In addition, GST-registered businesses and sole traders can potentially claim a GST credit for the asset purchases on their business activity statements (BAS).

Disadvantages of a chattel mortgage

• Early repayment or termination fees
While a chattel mortgage offers repayment flexibility, you may be charged a fee if you wish to repay the loan early.
• Tax complexity
Particularly if the vehicle is used for a combination of business and personal use, the admin involved in claiming tax deductions can be considerable.
• You can’t dispose of the asset during the term
While you own the asset, you will not be able to sell it during the finance term without the lender’s approval. This is why chattel mortgages are generally not as suitable for assets that need to be upgraded regularly.

Chattel mortgage balloon payments explained

The balloon or ‘residual’ amount is a lump-sum payment due at the end of the loan term. They are often used in chattel mortgages to reduce the regular repayments throughout the term of the loan.

Businesses may opt for a balloon payment if they wish to conserve funds and commit to lower repayments in the short-term. They are popular if the business has either no intention of owning the vehicle outright at the end of the term or will plan to trade in the asset and refinance a new vehicle.

Options at the end of your chattel mortgage term

Option 1

Pay the residual amount and retain full ownership for continued use, or sell the vehicle.

Option 2

Trade the vehicle in and purchase another with a new finance agreement, and use the proceeds from the trade-in to repay the outstanding residual amount on the initial loan.

Option 3

Refinance the balloon amount as a standard car loan and use the vehicle for personal use 100% of the time.

Lender approval criteria

Regardless of which chattel mortgage lender you apply with, there are some standard finance criteria you will typically need to meet, such as having:

Trading history of at least 6 - 12 months
An acceptable credit rating
A minimum level of turnover
A maximum level of other debt
An ABN and GST registration

If you’re buying a vehicle to the value of $150,000, most lenders will provide finance options if you have been operating your business for 12 months and have a clean credit history.

To finance a vehicle greater than $150,000, or if you have been operating as a tradie for less than 12 months, you’ll need to provide a greater amount of supporting documentation to satisfy lender approval criteria. You may need to provide:

Profit and Loss Statements and Balance Sheet
Business bank statements
Rates notice - for homeowners
Rental agreement - for renters

You will be asked to supply this additional documentation so that a lender is able to accurately assess your level of risk as a borrower, and whether you are capable of comfortably meeting repayments on the amount you apply for.

Chattel mortgage GST benefits

Using a chattel mortgage, 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). There is a limit to how much GST you can claim on a vehicle, which is set each year by the Australian Tax Office.

The maximum amount of GST you can claim on an asset is 1/11th of the cost limit set each year by the ATO.

The cost limit includes both GST and depreciation, and for 2024/25 is set at $69,674, meaning the maximum amount of GST you can claim on a vehicle is $6,334.

To qualify for GST benefits, your business is registered for GST on a cash basis and records income and expenses as they occur. Here’s how it works:

The business is registered for GST and operates on a cash basis
A lender approves a chattel mortgage and the business takes ownership of the vehicle
The vehicle or machinery qualifies as an asset purchase on the balance sheet for business
The GST of the asset’s initial purchase price is claimed back on the next BAS

A business can also claim depreciation on the vehicle in its end-of-year tax return, and all interest and fees paid are also tax-deductible. To ensure your business qualifies to make these deductions, you will need to first confirm your eligibility with your business account or financial advisor.

In addition , if the asset being financed is valued below $20,000 it may be eligible for the instant asset write-off, provided your annual business turnover is below $10 million. This means the full value of the asset can be claimed as a tax deduction in the year the asset is first used or installed ready for use. The instant asset write-off has been extended until 30 June 2025.

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Chattel Mortgages Explained (Pros & Cons)

What is a chattel mortgage?

How does a chattel mortgage work?

Who uses a chattel mortgage?

Pros and cons of a chattel mortgage

Benefits of a chattel mortgage

• Asset ownership

• Low interest rates

• Balloon payment option

• Tax benefits

Disadvantages of a chattel mortgage

• Early repayment or termination fees

• Tax complexity

• You can’t dispose of the asset during the term