What is Chattel Mortgage Financing?

The rather archaic term ‘chattel’ may not be as commonly used today as it once was but it is quite easy to comprehend. A chattel just refers to any piece of property, usually something that can be moved, that does not include land or real estate. A chattel mortgage is thus an agreement between a borrower and lender that grants the lender the right to take ownership of the movable asset, should the borrower breach the terms of its finance arrangement. In this sense, it works in a similar way to a traditional residential mortgage.

The lender will take an interest or ‘lien’ over the asset and, in the event of default, the asset, or assets, under the lien may be seized and sold to pay off the debt.

Many lenders interchange the term chattel mortgage with car loans and whilst chattel mortgage car loans are indeed the most popular form of chattel finance, it’s not strictly true that the two terms are interchangeable. A chattel mortgage can be used for any type of business vehicle finance or equipment finance. Chattel financing can also be used for things like aeroplanes, trains, trucks and tractors.

Best Chattel Mortgage Interest Rates

As of November 2022, the best chattel mortgage interest rates are currently between 5-7% in Australia. However, taking all associated fees into consideration, you’d be looking at an APR between 6-8%. When comparing chattel mortgage rates it’s always important to compare the APR, sometimes known as the comparison rate, as the provider offering the best chattel mortgage rates is not necessarily the cheapest if they’re accompanied with hefty establishment or management fees.

Of course, achieving the cheapest chattel mortgage rates will vary on a number of factors that are individual to each borrower, not least the risk profile of the business. Your credit history, the amount you’re looking to borrow, the length of the chattel loan required, whether you can afford a deposit, the sector you operate and the cash flow of your business could all impact the rate you achieve on a chattel mortgage. 

Also, the best chattel mortgage interest rates will only likely be offered on new cars or new business vehicles. Used vehicles could attract a higher chattel mortgage rate and this could increase with the vehicles age. So it’s a case of weighing up whether the higher costs of a new vehicle are worth it in order to attain the very best chattel mortgage interest rates on the market, it might be that paying more interest on a cheaper vehicle is a more optimal solution than simply finding the cheapest chattel mortgage rates. The type of chattel being financed could also influence the interest rate – the lender may consider rare vehicles to be more difficult to sell, in the event they are required to do so should the borrower default.

How Does a Chattel Mortgage Work?

In Australia, a chattel mortgage is only available to sole traders, partnerships and businesses. Individuals cannot access a chattel mortgage and, in order to qualify, the vehicle must be used at least 51% of the time for business purposes.

In a number of cases, you aren’t required to put a deposit down to access chattel finance as most lenders will generally finance 100% of the asset price through a chattel mortgage.

Chattel loans are both fixed-term (which is usually somewhere between 1-7 years) and fixed interest rate, meaning that the rate will stay the same for the life of the loan. As a borrower, you’ll make the same regular repayments to the lender (usually monthly) for the term that was agreed upfront. 

The term could be influenced by the type and age of the asset being financed, and how much the borrower can afford to repay each month. Short term chattel finance agreements mean you’ll be making larger repayments and longer term chattel loans mean you’ll be making smaller repayments. However, the longer the term, the more interest that will be accrued.

Chattel Mortgage Balloon Payments

A number of chattel loan providers offer chattel mortgage balloon payments, also known as chattel mortgage balloons. Providing borrowers the flexibility to lower the size of their repayments in return for making one large balloon repayment at the end of the agreement. A balloon payment may improve the borrower’s cash flow during the chattel finance term but borrowers will have to ensure they have the funds to repay the chattel mortgage balloon payment at the end of the agreement. If not, they would either have to default on the loan, or they may be able to refinance the remaining chattel mortgage balloon into a new loan. In the case of chattel mortgage car loans, there might be an option to trade in your existing car, use the proceeds to settle the existing chattel loan and then take out a new chattel loan on a new car.

Who Owns the Asset with a Chattel Mortgage?

A chattel mortgage sees the financier retain the title of the asset purchased until the loan is repaid in full but the asset purchased automatically belongs to the buyer at the onset of the loan. Thus, the borrower is fully responsible for maintaining and repairing the asset. The title is then transferred to the borrower upon all loan repayments being complete.

Accounting for Chattel Mortgage

There are various benefits to owning the asset outright under a chattel mortgage. The chattel becomes an asset on the borrower’s balance sheet and GST is claimable as an input tax credit in the next Business Activity Statement, regardless of whether GST is accounted on an accrual or cash basis. 

Depreciation on the vehicle or chattel can also be claimed in your tax return and all interest is tax-deductible. From 1 July 2022, i.e. for the 2022–23 financial year, the maximum value that can be used for calculating depreciation on the business use of a car is $64,741. The maximum GST credit you can claim is one-eleventh of the car limit, which is $5,885 in 2022–23. If car value exceeds the limit, $5,885 remains the maximum amount that can be claimed. 

Chattel Mortgage Car Loans

Cars are the most widely-used ‘movable asset’ in Australia that are out of reach for most buyers to purchase in cash. So it comes as no surprise that Chattel mortgage car loans are the most popular form of chattel finance. It’s estimated that private businesses make up 42% of all cars sold in Australia. 

Chattel mortgage car loans are also a very popular choice for businesses seeking car finance. Our complete guide to business vehicle finance runs through all of the options to finance a business vehicle, including chattel mortgages and various types of lease.

Chattel Mortgage vs Lease

When buying any piece of business equipment or vehicle, you generally have the option between using a loan to buy the equipment outright or to lease the equipment. There are some important aspects to consider in a chattel mortgage vs lease comparison.

The decision between a chattel mortgage vs lease will depend on your business circumstances and what it is you’re looking to achieve but again more information is available in our guide to business vehicle finance.

Common Industries for a Chattel Mortgage

Chattel finance is most common among companies looking to purchase company cars or heavy machinery, including things like trucks, trailers, mining equipment and farm equipment finance.

Common Industries for Chattel Finance

• Agriculture
• Aviation
• Buildiers
• Couriers
• Construction
• Delivery Companies
• Electricians
• Excavation
• Farms
• Landscapers
• Logistics
• Mechanics
• Mining
• Plumbers
• Removal Companies
• Sales Reps
• Tradies
• Wholesalers

Chattel Mortgage Rate Calculator

Use our chattel mortgage rate calculator to get a better understanding of the total interest payable on a chattel loan and how this translates into weekly, fortnightly or monthly repayments. Simply input the amount and term you’d like a chattel loan for, plus an estimated chattel mortgage interest rate or the interest rate you have been offered and then the chattel mortgage rate calculator will do the rest. If you have the cash at hand, there’s also the option to see how different deposit amounts can influence your monthly repayment volumes and total interest you will have to pay.

Calculating Chattel Mortgage Rates for a Used Truck – An Example

A transport company is looking to purchase a second hand cargo truck/trailer for $300,000. The company can pay a 15% deposit of $45,000 upfront for the truck/trailer. The chattel mortgage is for $255,000 with a loan term of 5 years. The interest rate on the chattel loan is 8%.

Based on monthly repayments and providing every repayment is made on time, $55,228.83 is payable in interest over the duration of the five year term. 

In order to pay the interest due on the loan, plus repay the principal, the transport company is set to pay back a total of $310,229 or $5,170.48 per month. 

Last Word: Chattel Finance 

Chattel mortgages are only available to businesses in Australia. So providing the chattel is to be used for business purposes at least 51% of the time, it is eligible for chattel finance. This is particularly important to remember for chattel mortgage car loans for sole traders and SMEs as a chattel mortgage will likely prove more cost effective than a personal car loan. A chattel mortgage sees the chattel being owned by the business immediately but the lender retaining the title on the chattel until all chattel loan repayments have been made.

The cheapest chattel mortgage rates are between 5-7% but these are only likely going to be available to businesses which have been operating for at least five years, have a strong credit profile and are looking to purchase a new vehicle or asset. Chattel mortgages often have the option of a chattel mortgage balloon payment which can reduce monthly repayments and, whilst it’s often not required, there’s also the option to pay a deposit upfront. It’s worth considering the pros and cons of a chattel mortgage vs lease but chattel finance is a very popular source of financing for many SMEs in Australia and certainly one to be considered.