Written byA chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Also known as: chattel mortgage loan, goods mortgage, commercial chattel mortgage
Key points
- You take ownership at settlement, so you can claim depreciation and, if GST-registered, the GST on the purchase price in your next BAS.
- The lender registers its security interest on the Personal Property Securities Register (PPSR) and can repossess the asset if you default.
- Terms usually run from one to seven years, with an optional balloon payment that lowers regular repayments.
- It is the most common way Australian businesses finance utes, trucks, plant and machinery.
How a chattel mortgage works
The lender pays the supplier for the asset and you take legal ownership straight away. In return, the loan contract gives the lender a mortgage over the goods (the "chattel"), which is a security interest carrying the right to repossess and sell the asset if you default. Registering that interest on the Personal Property Securities Register perfects it, so it ranks ahead of later claims and holds up if your business becomes insolvent.
You repay the loan in regular instalments, usually monthly, at a fixed rate for the life of the loan. Once the final repayment clears, the lender releases its interest and the asset is yours outright.
Tax and GST treatment
Because you own the asset, the tax treatment follows ownership. A GST-registered business can generally claim the input tax credit on the purchase price in the BAS that covers settlement, rather than spreading it across repayments. For passenger cars the credit is capped at one-eleventh of the ATO car limit. The repayments themselves carry no GST.
You claim depreciation on the asset and the interest portion of your repayments as deductions, to the extent the asset is used for business. Lenders typically require that business use is more than half.
Who uses a chattel mortgage
Chattel mortgages suit businesses that want to own the asset, claim the GST upfront and keep the asset on their balance sheet: sole traders buying a work ute, trades businesses adding a van, and companies financing excavators, trucks or manufacturing equipment.
If you would rather not own the asset, or you want to hand it back at the end of the term, a finance lease or operating lease may fit better. If you want ownership to pass only after the final payment, that is a hire purchase.
Example
A plumber buys a $60,000 ute on a five-year chattel mortgage with a 30% balloon. The lender pays the dealer, the plumber owns the ute from day one and claims the GST in the next BAS. The repayments only have to bring the balance down to the $18,000 balloon by the end of the term rather than to zero, which keeps them lower, although interest is charged on the full balance. After five years the plumber pays the balloon, refinances it, or sells the ute and uses the proceeds to clear it.
Not to be confused with
- Hire purchase
- under a hire purchase the financier owns the asset until the final payment; under a chattel mortgage you own it from settlement
- Finance lease
- under a finance lease the financier keeps ownership and you pay to use the asset
Frequently asked questions
How does a chattel mortgage work?
The lender pays for the vehicle or equipment, you take ownership at settlement, and the lender registers a security interest over the asset on the PPSR. You repay the loan in fixed instalments over one to seven years, with an optional balloon at the end. Once the loan is repaid the lender releases its interest.
What is the meaning of chattel mortgage?
"Chattel" is a legal word for movable property such as a car, truck or machine, and a "mortgage" is a loan secured against property. So a chattel mortgage is simply a loan secured against movable goods rather than land. The borrower owns the goods and the lender holds security over them.
What are the key differences between a lease and a chattel mortgage?
Ownership is the main one. With a chattel mortgage you own the asset from day one, claim depreciation and can claim the GST upfront. With a lease the financier owns the asset, you pay rentals that include GST, and the asset usually carries a residual value at the end of the term.
Can I claim GST on a chattel mortgage?
If your business is registered for GST and the asset is used for business, you can generally claim the input tax credit on the purchase price in the BAS covering the settlement date, capped at one-eleventh of the ATO car limit for passenger cars. There is no GST on the repayments. Check the ATO's guidance or speak with your accountant about your circumstances.
Is a chattel mortgage a good idea?
It depends on whether you want to own the asset, how you account for GST and how long you plan to keep the asset. Owners who want the deductions and the upfront GST credit often choose it; businesses that replace assets frequently sometimes prefer a lease. Compare the total cost, tax treatment and end-of-term options before deciding.
Related terms
Broader term: Asset finance
Hire purchase
Hire purchase is a finance agreement where a financier buys an asset and hires it to you for fixed instalments, with ownership passing to you at the final payment.
Read definitionFinance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionBalloon payment
A balloon payment is a lump sum, agreed upfront, that is paid at the end of a loan term and lowers the regular repayments by deferring part of the principal.
Read definitionSecurity (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionEquipment finance
Equipment finance is business finance used to buy or lease machinery, vehicles and other equipment, where the equipment itself secures the loan or is owned by the financier.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.