Chattel Mortgage Explained: What It Is and How It Works

A chattel mortgage is a secured business loan where you buy a vehicle or piece of equipment and own it from day one, while the lender holds a registered interest over the asset until you pay it off. Rates typically sit between 7% and 12% depending on your business profile, with terms from one to seven years. The structure is popular because it offers real tax advantages that other equipment finance types do not match.

Why businesses choose chattel mortgages in 2026

The chattel mortgage is the most common way Australian businesses finance vehicles and equipment, and 2026 has made it more attractive. The federal government's $20,000 instant asset write-off is now permanent from 1 July 2026, giving small businesses a reliable tax incentive to invest in equipment year-round rather than rushing before a deadline. For GST-registered businesses buying commercial assets, a chattel mortgage lets you claim the GST back on your next BAS, deduct the interest, and depreciate the asset. No other finance structure gives you all three.

How a chattel mortgage works

The mechanics are straightforward. You choose the vehicle or equipment, apply for finance, and once approved the lender pays the supplier directly. You take ownership and possession of the asset immediately.

The lender registers a security interest over the asset on the Personal Property Securities Register (PPSR). This registration stays in place until you make the final repayment, at which point the lender removes it and you hold the asset free and clear.

Your repayments are fixed for the life of the loan, covering principal and interest. You can also set a balloon payment (sometimes called a residual value) to reduce your monthly repayments, which we cover in detail below.

The key difference from a finance lease: with a chattel mortgage, you own the asset from settlement. With a lease, the lender owns it and you pay for the right to use it. That ownership distinction is what drives the tax treatment.

The three tax benefits of a chattel mortgage

GST input tax credit

If your business is registered for GST, you can claim the full GST component of the purchase price as an input tax credit on your next Business Activity Statement. On an $80,000 commercial vehicle, that is $7,273 back in your pocket within weeks of purchase.

There is one catch for passenger vehicles. The ATO caps the GST credit at 1/11th of the car depreciation limit, which is $69,674 for 2025-26. That means the maximum GST credit on a passenger car is $6,334, regardless of the purchase price. This cap does not apply to commercial vehicles like utes, vans, and trucks with a load capacity over one tonne.

Interest deductions

The interest component of every repayment is tax deductible as a business expense. On a $80,000 chattel mortgage at 8% over five years, total interest is roughly $17,300. At the 25% company tax rate, that saves your business around $4,325 over the life of the loan.

Interest deductions are claimed in the financial year the interest is incurred, not when the repayment is made. Your accountant will separate principal and interest using the lender's repayment schedule.

Depreciation

Because you own the asset, you can claim depreciation. How much depends on the asset's cost and your business size.

For small businesses with turnover under $10 million, assets costing less than $20,000 qualify for the instant asset write-off: the full cost is deductible in the year you first use the asset. Assets costing $20,000 or more go into the small business pool, depreciating at 15% in the first year and 30% each year after that.

On an $80,000 ute (ex-GST cost of $72,727), pool depreciation gives you a $10,909 deduction in year one and roughly $18,545 over the first three years. At 25% tax, that is $2,727 back in year one alone.

Balloon payments: how they change the equation

A balloon payment is a lump sum due at the end of your loan term. Setting a balloon reduces your monthly repayments but increases total interest, because you are paying down the principal more slowly.

The trade-off is straightforward. A 30% balloon on an $80,000 loan means $24,000 is deferred to the final month. Your monthly repayments drop, but you pay more interest over the term and need to deal with that $24,000 when the loan matures.

At maturity, you typically have three options. Pay the balloon and own the asset outright. Refinance the balloon into a new short-term loan. Or trade the asset in and use the proceeds to cover the balloon, often rolling into a new chattel mortgage on a replacement vehicle.

Most lenders allow balloon payments between 10% and 40%, depending on the asset type and its expected resale value at the end of the term. A ute holding strong resale value might support a 30% balloon. Specialised equipment with limited resale may be capped at 10% to 15%.

What a chattel mortgage actually costs: worked example

Here is what an $80,000 ute (GST-inclusive) looks like under a chattel mortgage at 8% over five years, with and without a balloon payment. We have also included an unsecured business loan for comparison.

The chattel mortgage with no balloon costs roughly $17,300 in interest but recovers $7,273 in GST and generates ongoing tax deductions through interest and depreciation. The unsecured loan costs nearly double the interest and offers no tax benefits at all.

The balloon option cuts monthly repayments by around $400, which helps cash flow. But total interest rises by roughly $3,600 over the term, and you still owe $24,000 at the end. For businesses that replace vehicles on a regular cycle, the balloon aligns with a natural trade-in point.

These figures are illustrative. Your actual rate, repayments, and tax position will depend on your business profile, the asset, and your accountant's advice. Subject to lender approval, terms, and conditions apply.

Who qualifies for a chattel mortgage

Chattel mortgages are available to businesses, not individuals buying for personal use. You will need an ABN and the asset must be used primarily for business purposes.

Lenders typically look at four things. Your time in business, with most wanting at least 12 months of trading (some accept six months for strong applications). Your credit history, where paid defaults older than two years are usually manageable but recent or unpaid defaults will narrow your options. The asset itself, including its age, type, and expected resale value. And your capacity to service the repayments based on your business income.

If your financials are thin, a larger deposit (10% to 20%) strengthens the application. It reduces the lender's exposure and can improve your rate. For businesses without full financial statements, low doc business loans may be an alternative path.

When a chattel mortgage is not the right choice

A chattel mortgage is not always the best structure. If you are not registered for GST, you lose the biggest immediate benefit: the input tax credit. A hire purchase or operating lease may suit better in that scenario.

For assets under $15,000, the cost of setting up a secured loan (PPSR registration, documentation fees) can eat into the savings. An unsecured personal loan or business loan might be simpler and close to the same total cost.

If you want to keep the asset off your balance sheet, a chattel mortgage will not do that. The asset and the liability both sit on your books from day one. A finance lease or operating lease handles this differently.

And if the asset is for personal use, a chattel mortgage is not available. You will need a standard car loan or personal loan instead.

This article is general information only and is not financial advice.