Chattel mortgage

What is a chattel mortgage?

A chattel mortgage might suit you if:

• You’re a business, or an individual using a vehicle predominantly for business

• You don’t want a residual value (a remaining balance to pay) at the end of the agreement

• You need to “own” your vehicle on paper (for example if you’d like it counted as a business asset)

• You’re unable to qualify for a novated lease

In this arrangement, the lender puts up the funds for your vehicle and holds a mortgage over it. You are technically the owner from the start and, once you’ve paid out the loan, you’ll own it outright.

How a chattel mortgage works

1. You borrow the cash for your vehicle from a lender. 

2. The lender holds security over the vehicle (that means taking out a mortgage, just like you would on a house). 

3. You need to make your loan repayments (otherwise the lender may take the vehicle back, just like if you didn’t make your house mortgage payments)

4. Once the agreement’s up, you’ll own the vehicle outright.

Advantages of a chattel mortgage

The main advantage of this product is its flexibility.

1. If you use your vehicle predominantly for business, you can claim your chattel mortgage as a tax deduction

2. You’re able to pick your preferred loan term (12-60 months) and can choose to have a residual (a remaining balance, or ‘balloon payment’) or not. 

3. You also have choice over the residual percentage, which helps reduce monthly repayments or align payments with cash flow requirements. These payments are fixed for the term.

4. You can get lower interest rates than a standard car loan (consumer loan)

5. If you’re registered for GST, you might be able to claim the GST portion of the vehicle purchase price on your next business activity statement (BAS).

6. Your vehicle is seen as an asset on paper, as you take ownership from the start

Disadvantages of a chattel mortgage

If you’re an individual paid under a PAYG structure, a novated lease is generally a more tax effective option. With a novated lease, you won’t pay GST on vehicle running costs and the tax benefit is ongoing and automatic. With a chattel mortgage, you need to wait until tax time to claim against your personal income tax return.

If you intend to claim business usage on a chattel mortgage, you are only able to claim a portion of the vehicle depreciation, interest and operating costs. Whereas with a novated lease, you can claim the entire cost of the lease.

The end of the lease

Once the loan and any applicable residual value has been paid, the lender will remove the mortgage. Once your contract is completed and there are no outstanding payments, you’ll own the vehicle outright.