A Chattel Mortgage is a loan agreement whereby the customer borrows funds to purchase equipment and takes ownership of this equipment right from the start. The lender will take a charge over the equipment as their security. The equipment must be used predominantly for business use. Terms generally range from 12 to 60 months, and the interest rate is fixed for the term. Chattel Mortgages can sometimes be called an equipment loan, commercial loan, national commercial loan.
What are the benefits of Chattel Mortgages?
- Flexibility of having a deposit or trade at the start of your contract to reduce your overall payments
- Short or long term contract 1-7 years usually
- Tax advantages – deductions for depreciation of the asset and interest paid
- Easy budgeting as your payments are fixed so you know what you’re up for each month
- Balloon or residual payment at the end or reduce your overall payments
- Structured payments to suit your cash flow such as monthly, quarterly, yearly and seasonal
- Claim 100% of the GST as a credit on your BAS statement at the purchase of the equipment
What equipment do chattel mortgages best suit?
Chattel Mortgages are ideal for acquiring most forms of business equipment that moves and has a service life of several years such as the following:
- Manufacturing machinery
- Cars, trucks and commercial vehicles
- Computers and IT systems
- Earthmoving equipment
- Cranes and construction equipment
- Boats, aircraft and buses
Ownership under a Chattel Mortgage
Under a Chattel Mortgage the ownership of the goods is with the purchaser/customer from the outset once the invoice is raised and the financier has paid for the goods. The customer makes fixed payments over the term of the contract to repay the goods. There is no GST the instalments.
Residuals/Balloons on a Chattel Mortgage
Chattel Mortgage agreements often contain options for residuals or balloon payments at the end of the term. Taking a balloon payment at the end of the term will reduce the monthly repayment during the contract.
Accounting under Chattel Mortgage
The purchase price under a Chattel Mortgage agreement is treated as a capital purchase and depreciated over the life of the asset. The interest costs are also treated as an expense. GST is included in the purchase price of the goods Under a Chattel Mortgage, depreciation on the goods and interest charges are normally treated as deductible expenses for businesses*. GST is claimed back in full upfront by the customer
* Please refer to your Accountant or Advisor for Tax advice.
Upgrades and Add Ons
Upgrades and add ons generally require another hire purchase agreement and/or the payout of the old Chattel Mortgage agreement.