How Does A Chattel Mortgage Work?
Under a chattel mortgage, the lender (bank, finance company) takes the asset (chattel) that you’re using the loan for (e.g. car, boat) as collateral. The lender registers an interest (also known as an encumbrance) in the chattel to show others that they are using it as security for the mortgage.
Whilst you take ownership of the chattel at the time of purchase the lender will keep their interest registered until the mortgage is fully paid. Once the mortgage is paid in full the lender removes their interest and you have what is known as ‘clear title’.
Chattel mortgages are commonly used by companies, partnerships and sole traders when the chattel is going to be used predominantly (50%+) for business use. Under Australian Taxation Office (ATO) rules, businesses that account for GST on a cash basis (they record business income and expenses as and when they occur) are generally entitled to claim an Input Tax Credit (ITC) for all of the GST contained in the purchase price of the chattel on their next Business Activity Statement (BAS).
Who Does A Chattel Mortgage Suit?
A chattel mortgage is suitable when the asset will be used predominantly (50%+) for business purposes. The product is mainly used by ABN holders – companies, sole traders, trusts and partnerships.
Chattel Mortgage – Pros
Potential Tax Benefits – Under a chattel mortgage when the asset is used for business purposes you can claim the interest charges, running costs and depreciation as tax deductions. If you are registered for GST you can claim some or all of the GST contained in the purchase price of the asset when you lodge your next Business Activity Statement (BAS) rather than over the term of the loan.
No Capital Outlay – You can get the asset that you need for your business with zero or minimal outlay, so any capital that you do have can be used for other things.
Effective Cashflow – You can opt to include a residual value (balloon payment) at the end of your loan which reduces your repayment and frees up more cash.
Inclusions – You can potentially include things like government fees, insurance premiums and accessories as part of your loan, so one repayment covers all of your costs.
Minus Equity – If you are trading in an asset which is financed and you owe more on the outstanding loan than the asset is worth you may be able to include this minus equity amount in with the loan for the asset that you’re buying.
Chattel Mortgage – Cons
Security – Although using your asset as security can help to get you a lower interest rate it also means that if you don’t make your agreed payments you risk the asset being repossessed.
Personal Use – If you’re using the vehicle for predominantly personal purposes then a chattel mortgage is not the most effective option for you.
Asset Only – By securing the loan against an asset it means that the amount that you borrow can only be used for the purpose of buying the asset. You can’t split the funds and use part of the asset and part for something else.