Chattel Mortgages - A Primer

Chattel Mortgages - A Primer

If you’re in business and looking to finance vehicles, equipment, or other costs associated with business, you’ve likely come across the term chattel mortgage. What is a chattel mortgage, and how does it differ from consumer loans?

What a chattel mortgages are

A chattel mortgage is a type of commercial loan (intended for 50% or more business use) that allows business owners to take possession of the equipment (as an asset), set up the loan according to their needs, and claim various benefits using their BAS or tax accounting.

Chattel mortgages in practice

When your business buys its equipment through chattel mortgage finance, it shows up as an asset on their balance sheets. You pay this off as you would a normal “mortgage”. A chattel mortgage is a type of secured loan (hence the “chattel” part of the mortgage – which comes from Old English for “moving property”) – you take on more risk as any defaults may result in repossession. If you are in good financial health, this means savings in the form of lower interest rates.

Businesses can also finance 100% of their asset purchase price. This makes it a cash-flow neutral solution. Chattel mortgages amounts can exceed 100% and spread the costs of extras such as insurance premiums or scheduled servicing for cars, or software licences for IT equipment, and so on.

Businesses and companies can extend their loan terms beyond the usual five years. You can pay off a chattel mortgage in as little as 12 months or as long as seven years, or even beyond (lender permitting.)

You can also incorporate a balloon payment, also known as a residual value payment, into the loan. This keeps regular repayments low, but a lump sum is due at the end of the loan term. In some cases, you can refinance the balloon, trade in your car or equipment to clear the loan, or simply pay it off and finish the transaction. This may be useful if you wish to upgrade your equipment.

Chattel mortgages – tax benefits

Since chattel mortgages finance the cost of doing business, you can claim a range of tax benefits.

First off, you can claim the GST paid on the purchase price of your equipment, usually on your next BAS. You may also be able to claim the instant $20,000 asset write-off the Federal Government offers as of FY2017-18.

If you are financing a car, you may claim the fuel input tax credit, deprecation on the car and interest on your repayments. Lenders may claim interest and pass on the saving to you, or you may claim the deduction directly. Either way, your business can save money and keep cash flowing with a chattel mortgage. Many lenders and banks also offer flexibility for seasonal businesses, allowing you to ramp up or ramp down your repayments according to your business ebbs and flows.

To find out more, or to talk to someone about chattel mortgages, talk to Peerless Finance.

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