What Is A Chattel Mortgage?
Synopsis
A chattel mortgage lets Australian businesses own vehicles or equipment from day one while accessing potential tax and GST benefits. Learn how it works and whether it’s the right finance option for your business.
As a business owner in Australia, if you’re looking to purchase a vehicle or piece of equipment, you will probably have come across the term, “chattel mortgage” when researching financing options. Essentially, the chattel mortgage is a consummate business loan where you own that asset on the day you purchase it, and the lender takes the asset itself as collateral. In contrast with a lease or hire purchase, ownership works very differently here. In this article, we explain exactly what a chattel mortgage is and how it works compared to a lease or hire purchase, and which of these options might be the best fit for your business.
What Is A Chattel Mortgage?
A chattel mortgage is a type of business loan that’s taken out by an individual or business to borrow money against movable possessions that have been purchased.
A chattel mortgage is a business loan that you use to purchase the vehicle, equipment or machinery. The term “chattel” refers to a tangible, mobile property. That is, a work ute, forklift or manufacturing equipment.
How does it work?
You borrowed money from a lender to buy the asset outright. That asset is immediately yours legally. The lender will then register a mortgage against the asset so that if you fail to repay them, they have the right to take it back from you and sell it on in order to recoup their costs. You repay the loan over a set term, often with fixed monthly payments, and you can also elect to include a balloon payment at the end of the term which reduces your monthly payments
This finance option can only be used for business purposes. If you are a sole trader, company or ABN holder using the asset principally for business purposes it is something worth considering.
Difference Between Chattel Mortgage and Lease
The most important distinction between a chattel mortgage and a lease is who owns the asset. In a chattel mortgage, you own the asset from day one but if the loan is not paid off, then the lender has a claim over it.
When you have a lease, the lender or the finance company retains ownership of the asset for its full life. You simply pay to use it. With most finance leasing options, at the end of your lease you’ll have a right to purchase the asset for an agreed price. If you have an operating lease, you simply give the asset back at the end of its course period which is beneficial for companies that tend to renew their appliances or vehicles regularly.
Leases often require a smaller upfront payment and can be justified if of course, you don’t want the asset on your books long-term. However, you miss out on some of the ownership-based tax benefits that go along with a chattel mortgage.
Chattel Mortgage or Hire Purchase: What are the differences?
Hire purchase falls somewhere in the middle. With hire purchase, the asset is owned by the finance company, which you then rent from with a series of payments. You will not be the owner until you pay the last payment.
With a chattel mortgage, this is in reverse, you own the asset immediately and the loan is secured against it.
In practice, chattel mortgages are now used far more widely than hire purchase agreements in Australia mainly because of the tax and GST benefits available from owning the asset immediately.
What Are The Tax And GST Benefits of a Chattel Mortgage?
That’s where a chattel mortgage usually wins for GST-registered businesses. If your business is registered for GST and accounts on a cash basis, you normally can take the entire GST credit you paid toward the asset’s purchase price in your next Business Activity Statement rather than claiming it over time. If you lease or hire purchase, GST is usually claimed from each payment.
You can also make general tax deductions for interest charges and depreciation on the asset because the asset is owned as a business expense from day one. It is worth checking whether your purchase includes GST, which will depend on the accounting method by which you operate.
What Are The Pros And Cons Of A Chattel Mortgage?
Pros:
- You own the asset from day one which is reflected as an asset on your business balance sheet.
- If you are registered for GST then typically, you can claim the GST credit.
- You can claim interest and tax deductions.
- Flexible loan terms with the choice of a balloon payment to minimise monthly repayments.
- You own the asset outright, meaning there are no ongoing usage restrictions.
Cons:
- You need to have enough business use of the asset generally more than 50%.
- Not available to individuals, solely for business usage.
- You own the asset, so you take the risk of its depreciation.
- If you expect to replace your equipment often, a lease is probably better for you.
Chattel Mortgage, Lease Or Hire Purchase: Which Is Right For My Business?
The best option will depend on what matters most to your business. Usually, if you want to have ownership of the asset from day one and obtain tax deductions up front while also receiving your GST credit upfront, a chattel mortgage is generally going to be more appropriate. That suits things like tradies and transport companies or businesses who are buying equipment that they plan to hang onto for a while.
However, if you would rather make less in terms of a deposit and want the flexibility of having newer equipment or vehicles every few years, a lease will often suit your business needs better, especially when cash flow is tight.
Hire purchase is a less popular option these days but it remains available to spread the cost of an asset over time if you are happy not taking ownership until the final payment has been made.
One way to quickly consider this is, if tax deductibility and the ability to own now under a chattel mortgage are your top priorities. If low initial cost and flexibility are more important to you, a lease might be better.
What are the interest rates and loan terms for a household mortgage?
Chattel mortgage interest rates depend on your business credit history, the asset type, the loan term and market conditions because rates usually move depending on the cash rate set by the Reserve Bank of Australia. Loan terms range from one to five years, but many lenders allow your loan to be structured with a lump sum at the end so your monthly repayments remain as low as possible. Make sure to compare quotes from several lenders or speak to a finance broker because there can be wide variation between rates and terms.
Does a Chattel mortgage work for Sole Traders and ABN Holders
Yes. Even if an asset is primarily used for business, chattel mortgages are still accessible to sole traders, partnerships, companies and trusts. You will typically require an active ABN, and prove that the asset is to be used for business rather than personal use.
What Is The Instant Asset Write-Off For A Chattel Mortgage?
The Instant asset write-off allows eligible small businesses with an annual turnover of less than $10 million to deduct the cost of a depreciable asset costing less than $20,000 when it is first used or installed ready for use. This threshold of $20,000 is locked in by law for 2025–26, covering the year starting 1 July 2025 and ending on 30 June 2026.
Under a chattel mortgage, you own the asset outright which in turn means it qualifies for this write-off; a leased asset does not qualify since the lender is still technically the owner. If the asset is priced at $20,000 or greater then it enters the small business depreciation pool reducing by 15% in year one and 30% thereafter.
It’s also worth remembering there’s an additional car limit that relates to the cost of a work vehicle which you can claim depreciation on, regardless of the write-off threshold - this stands at 69,674 for FY2025–26. As thresholds are reviewed and can change with every Federal Budget, it is worth checking current figures on the ATO website or with your accountant each financial year.
What Is A Balloon (Residual) Payment On A Chattel Mortgage?
A balloon payment or residual, is an amount you pay in one go at the end of your loan term instead of paying off the full amount by making monthly payments. A balloon payment reduces your monthly repayments over the course of the loan term (meaning lower cash flow), but you’ll have to either pay, refinance or sell the asset to be able to afford that final big lump sum at the end of your loan term.
FAQs
Is a car loan considered to be the same as a chattel mortgage?
Not exactly. The chattel mortgage is for business purposes only, while regular auto loans can be for personal or business use and ownership and tax treatment are handled differently.
Can I claim GST on a chattel mortgage?
So yes, you are allowed to claim the GST credit upfront for VAT-exempt businesses as long as you qualify (not in all provinces or territories) and your purchase price is paid for with cash accounting policy (not necessarily on an ongoing basis).
Do I own the asset immediately with Chattel Mortgage?
Yes, you are the legal owner immediately but have a lender with a mortgage secured against the asset.
Is chattel mortgage better than a lease?
It depends on your business needs. If your business desires to own and claim tax benefits now, consider a chattel mortgage; businesses that need flexibility with lower upfront costs should opt for a lease.
Can I get a chattel mortgage as a sole trader?
Yes, provided the asset is primarily used for business purposes and you qualify with the lender.
This article is for general information only and does not take account of your personal circumstances. Before you consider business asset finance, be sure to speak with a regulated accountant, financial adviser or finance broker.
At Inspirepreneurs Magazine, covering entrepreneurship, business failures, and the human stories behind the world's most ambitious founders. She writes at the intersection of strategy and storytelling.
