What is Chattel Mortgage?
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What is a chattel mortgage?
A chattel mortgage is a type of loan used by businesses to purchase new and used vehicles or other business-related equipment. In many ways, the chattel mortgage is simply an improved version of what was known for years as commercial hire purchase (CHP).
How a chattel mortgage works
Essentially, a chattel mortgage finances goods and acts as a mortgage over them.
When you finance vehicles and equipment through a chattel mortgage, they classify it as a cash sale. This means that the goods automatically become yours upon purchase, and the finance company places a mortgage over those chattels.
For tax purposes, you can claim the asset’s depreciation and the interest paid on your loan as an expense to offset your business income. A chattel mortgage also allows businesses to immediately claim the full input tax credit on the GST applicable to those assets on their next Business Activity Statement (BAS).
Structuring a chattel mortgage
The chattel mortgage is a very flexible finance option. It gives you the ability to either finance the purchase price in full (often including GST) or include an upfront deposit or trade-in to reduce your monthly instalments.
You can also place a balloon payment at the end of the term to represent the equipment’s end value. This can reduce your monthly repayments, which benefits cash flow.
Alternatively, opt for a fully amortized loan where you pay off the chattel mortgage entirely during the agreement term.
What can I use a chattel mortgage to purchase?
Chattel mortgages finance long-lasting assets like machinery and vehicles, allowing their purchase without tying up working capital.
Benefits of a chattel mortgage
The chattel mortgage has gained substantial popularity with small to medium businesses since the implementation of the GST and accelerated depreciation, as it typically offers more tax-deductibility than finance leases (where only the monthly finance payment is deductible).
Businesses registered for GST can claim the entire upfront GST cost of the asset as an imputation taxation credit (ITC) in their next BAS submission, provided the asset is for business use.
Chattel mortgages suit STS-eligible small businesses (<$10m turnover), offering an ideal financing solution for their needs. These businesses have the advantage of pooling mortgaged assets. They can claim a depreciation rate of 15% in the first year, followed by 30% diminishing value, regardless of the financed asset type.
Key features of a chattel mortgage
- Up to 100% financing (including GST if desired).
- Businesses registered for GST can claim 100% of the input tax credit in the business activity statement (BAS) following purchase.
- Businesses take full ownership of the equipment – the equipment is simply used as security for the loan.
- Payments may be structured either monthly in advance or in arrears (commencing 30 days after the loan settles).
- Finance term usually up to 5 years.
- Payments and interest are fixed for the life of the transaction.
- Available for new or used equipment (including private sales).
- GST is not applicable on monthly instalments or the final balloon.
- Structure balloon payments to reduce monthly repayments, allowing for refinancing in a second term after the initial loan ends.
Looking to finance via a chattel mortgage?
Utilize our chattel mortgage calculator for payment estimates or consult our experts to explore suitable financing choices.
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