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What is a chattel mortgage?

A chattel mortgage is a car financing option to buy a vehicle for work or business use. “Chattel” refers to movable property – in this case, the car being purchased. A chattel mortgage doesn't always have to be be for a buying a car - it could be used to buy trucks or other business equipment.

To be eligible for a chattel mortgage in Australia, the car or other vehicle being purchased will need to be used for business purposes more than 50 per cent of the time.

As well as letting business owners  benefit from access to a vehicle for work, other benefits of a chattel mortgage may include some tax benefits. For example, the car can be considered a business asset, allowing you to claim the GST from the vehicle’s purchase price as an an input tax credit on your next Business Activity Statement. 

You may also be able to claim the interest charges on the chattel mortgage and the vehicle's depreciation costs as tax deductions – check with the ATO and/or a tax accountant to learn more.  

Is a chattel mortgage a lease or a car loan?

A chattel mortgage is a type of secured car loan, where ownership of the car changes hands and repayments are made to a lender.

This is different to a car lease or hire purchase, where an individual or business pays for access to a car, but may not get the option to own the vehicle outright.

How does a chattel mortgage work?

A chattel mortgage works a lot like a secured car loan, where the risk of the loan is offset by the value of the vehicle. If repayments can’t be made, the financier can repossess and sell the car.

Unlike with a car lease or hire purchase, the business buying the car becomes the new owner at the start of the chattel mortgage, though they’ll still need to make loan repayments to the finance provider in instalments.

Chattel mortgages often have fixed interest rates, which should remain the same for the full term of the chattel mortgage. This should allow you to calculate your monthly payments and the total cost of the car in advance.

Another common feature of many chattel mortgages is the balloon payment. This is an arrangement repayments are only made on a percentage of the loan amount, leaving the rest as the balloon or residual value. At the end of the term, you can choose to either make the final balloon payment and own the car outright, or refinance the loan for the residual amount, potentially trading the car in for a different model. A balloon payment can help reduce the ongoing costs and improve your cash flow, though you may end up paying more in total interest charges if the loan takes longer to pay off.

Can you terminate a chattel mortgage early?

Some lenders may offer the options to pay off a chattel mortgage ahead of schedule, which could mean paying less in interest charges over the long term. 

However, keep in mind that these lenders may charge fees for paying a chattel mortgage early. It may be worth checking if any fees will apply, and considering whether the potential interest savings from terminating your chattel mortgage early will be worth the extra cost of fees. 

Can a chattel mortgage be for an individual?

While a chattel mortgage has to be for a vehicle to be used for work purposes, an individual may be able to make use of one if they are a sole trader, small business owner or similarly self-employed Australian. You’ll need to have an Australian Business Number (ABN), be registered for the Goods and Services Tax (GST) and have a clear credit history. 

What are chattel mortgage fees?

While chattel mortgage may have lower interest rates than some other car finance options such as unsecured car loans, remember that you may also need to pay fees to the lender. 

The fees you pay may be based on the age of the car being purchased – the older the vehicle, the higher the fees. These fees may include an establishment fee paid upfront when you first take out the chattel mortgage, or an ongoing fee that’s charged each month. 

It may be worth checking the comparison rate for a chattel mortgage. This combines the cost of interest charges and standard fees into a single percentage, to give you a better idea of the overall cost. 

Is there a chattel mortgage calculator?

Because a chattel mortgage works a lot like a secured car loan, you can often use a car loan calculator to estimate your repayments.

Simply enter the loan amount, loan term and interest rate to find how much it may cost, both in monthly repayments and in total over the long term.

Keep in mind that your repayments may be different if you choose a chattel mortgage with a balloon payment. This residual amount may be paid at the end of the loan term, or refinanced into a new loan, possibly trading in the old car for a new model.

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How do you get a chattel mortgage?

  1. Compare chattel mortgage options and work out which one may best suit your needs
  2. Contact the lender providing the chattel mortgage – you may be able to use an online application form, get in touch over the phone, or visit a branch.
  3. Supply documents – The lender may require confirmation of your ABN, that your business is registered for GST, and that you’ve been in business for at least six months. You may also need to provide business bank statements, as well as details of your permanent citizenship or residency.
  4. Pick up the car!

What is a chattel mortgage?

A chattel mortgage is a mortgage on a movable item. In the case of a car loan, the chattel is the vehicle. The lender maintains a mortgage over the chattel/vehicle until the loan is fully repaid.

What do I need to apply for a chattel mortgage?

Chattel mortgages are a form of secured car loan for businesses. The lender will set up a mortgage, while you take the car’s ownership. When the mortgage is paid off, you own the car. The borrowed amount is repaid through regular installments over a fixed period of time.

To qualify, you’ll have to meet the following chattel mortgage requirements:

  • The car should be used for business purposes at least 51 per cent of the time.
  • You must hold a valid Australian Business Number (ABN).
  • You must show you can service the loan on time
  • Identity proof
  • Financial records, such as profit and loss account and balance sheet
  • Details of the vehicle you want to buy
  • Bank statement for your business

What is a chattel mortgage fee?

A chattel mortgage fee is an amount you’ll pay the lender to procure the funds for a chattel mortgage.

You can use a chattel mortgage to finance vehicles used for your business at least 50 per cent of the time. It’s similar to a secured vehicle loan. The lender will give you the funds required to purchase the vehicle whilst you retain the ownership. The finance company then holds a mortgage on the vehicle, using the car as the security, until you repay the loan amount. At the end of the loan term or once you’ve paid it off, the lender will release the mortgage. Alternatively, you can opt to trade-in or refinance the residual value.

Can an individual apply for a chattel mortgage?

Lenders offer chattel mortgages as a way to finance vehicles used for business purposes. Companies, as well as individuals, are eligible to apply for and receive chattel mortgages. The essential eligibility requirement is that the vehicle is used for business at least 51 per cent of the time. If you’re a tradesman and require a new utility vehicle to move equipment, you can apply for a chattel mortgage to finance the purchase.

A chattel mortgage for individuals is an option if you’re self-employed and have an Australian Business Number (ABN). You’ll also need to be registered for the Goods and Services Tax (GST) and have a clear credit history. Like all other loan types, you’ll have to prove your capability to service the loan to qualify for a chattel mortgage.

You’ll retain the ownership while the lender holds the vehicle as security for the loan in a similar way as they would a property with a home loan. You repay the borrowed amount in predetermined monthly instalments. Once you repay the entire loan amount, the lender will remove the mortgage.

What is a chattel mortgage used for?

A chattel mortgage is usually used to buy an asset - such as a car - for your company for business use. Relatively similar to regular mortgages, a chattel mortgage structure is based on a lender providing you with funds to purchase an asset while registering their security interest on the Personal Property Securities Register (PPSR) for the life of the loan. In this case, the asset is known as the chattel. After the loan has been repaid, you will have full ownership of the asset. 

A popular finance option, a chattel mortgage is usually preferred by self-employed or small business owners, due to flexible options available for repayment. In some cases, you may get 100 per cent of the cost of the asset, which means that no upfront deposit needs to be put down.

However, it’s important to note that a chattel mortgage is not regulated under the National Consumer Credit Protection Act. It’s therefore important to seek advice about the product and fully understand the agreement terms before signing.

This article was reviewed by Head of Content Leigh Stark before it was published as part of RateCity's Fact Check process.