What is a chattel mortgage?

A chattel mortgage is an older term that refers to a business loan to purchase a car, vehicle or a piece of equipment, which is then used as security against the loan. Some lenders, including NAB, may call it an equipment loan.

How a chattel mortgage works

A chattel mortgage is a type of loan a lender may offer you to buy a vehicle. While the vehicle or equipment is owned by the business, the lender uses the vehicle as security against the loan. This gives the lender peace of mind you'll pay back the loan. It's much like a fixed rate traditional home loan or mortgage.

Chattel mortgages are different from other types of asset finance, like a hire purchase or financial lease, in several ways. Hire purchases involve renting a car or equipment from a lender and paying in regular instalments to ultimately purchase the car or equipment.

With a finance lease, the financier owns the vehicle or equipment and the borrower has the opportunity to buy it for an additional price. In a chattel mortgage, once the loan is completely repaid the borrower owns the vehicle or equipment outright.

Benefits of a chattel mortgage for a business

Chattel mortgages come with many benefits; these include:

• interest rates are usually lower than an unsecured loan, such as a consumer car loan.
• unlike a hire purchase or finance lease, a chattel mortgage gives you ownership from the start, so it appears as an asset for your business as well as a liability (the loan).
• businesses can claim tax deductions on the interest and depreciation associated with a chattel mortgage.
• repayments can be fixed. They can also be structured to suit the cash flow of your business.
  
• you can choose to set a balloon payment at the end of the term. This gives your business the ability to decide whether you’d prefer to keep your monthly repayments down by paying more at the end of the term.
• repayments can be structured over a range of terms, usually two to five years.

Chattel mortgage vs hire purchase

With a chattel mortgage, your business maintains full ownership of the vehicle. Comparatively, hire purchase involves leasing a vehicle or equipment from a lender for a fixed term. Your business does not maintain ownership over the vehicle or equipment.

However, at the end of the loan term, ownership may be transferred from the lender to your business.

Before deciding, consider the tax implication and the option that best suits your circumstances.

What are the tax benefits of a chattel mortgage?

Generally, purchasing a vehicle or equipment with a chattel mortgage may have certain tax benefits such as the ability to:

• claim interest payments: The interest paid on your chattel mortgage may be claimed as a deduction in your annual income tax return provided it is for a business purpose.
• claim the depreciation value: Your vehicle or equipment will depreciate in value over time. Youmay be able to claim this depreciation as a tax deduction provided it is used for a business purpose.
• claim GST credit: The GST paid for business cars, vehicles or equipment may be, depending on your circumstance, claimed back if they're being used for business or commercial purposes.

We recommend you seek your own independent tax advice for your situation as we cannot provide tax advice to you.

Balloon payments explained

Balloon payments are one-off large payments that you can pay at the end of the loan term. They get their name from the inflated size of the payment compared to the other payments throughout the term of the loan.

One of the main benefits of a balloon payment is that the higher your balloon payment, the lower your monthly repayments will be. This can help your business maintain cashflow for day-to-day expenses. Before agreeing to a balloon payment, make sure it's manageable and that it won't negatively impact your finances.

Our vehicle and equipment finance solution

At NAB, we also offer a business car, vehicle and equipment loan. Like a chattel mortgage, it allows you to purchase vehicles or equipment with no upfront deposit so you can keep the money in your business. Generally, the only security needed is the asset itself.  This might be a good option for you if:

• your business has a valid Australian Business Number (ABN)
• you intend to use the product mostly for business purposes.

If you’re not sure if this is the right finance option for you and your business, we have some handy tools that could help. Calculate what your repayments would be, opens in new window with our Chattel mortgage calculator, and view our chattel mortgage interest rates.

Explore our range of guides and articles to learn more about purchasing vehicles and equipment.