What is a Chattel Mortgage
Chattel Mortgage
A Chattel Mortgage is a lender taking a Mortgage over your Chattel (asset) as security for the loan.
This is a popular loan type many businesses use that provide the benefit of you owning your equipment upfront so you can claim tax benefits such as:
Claim the GST (if registered for GST)
Claim the Interest (if the goods are used for 100% business use purposes, you claim 100% of the interest – if you use the goods for 80% business use purposes, you claim 80% of the interest)
Claim Depreciation or claim it as an Immediate Write Off otherwise known as the small business Instant asset write-off which currently stands at 20k per asset. ATO Instant Asset Write-Off
Please note, your accountant will be the best person to advise you on tax advice, this is just a general guideline.
For vehicles and some equipment – you can have a balloon at the end of the term which you determine at the start of the contract.
Otherwise, at the end of the term on a Chattel Mortgage – the security is released and the loan automatically finishes once the final repayment is made.
What are the benefits of a Chattel Mortgage?
Get access to purchase the equipment your business needs straight away by financing assets
Repayments can be set from 1-5 years based on your cash flow requirements
Interest rates are generally lower than unsecured loans
You have the option to structure your repayments to suit your seasonal cash flow requirements
You own the financed asset up-front, it will be an asset on your balance sheet as well as the finance showing as a liability
With vehicles and heavy equipment - balloon or residual payments can be set at the end of the term to lower your monthly payments
What’s a balloon/residual?
A balloon payment or residual amount is an amount that's not paid off until the end of your agreement. The higher the balloon payment, the lower your monthly repayments.
You have the following options with a Balloon/Residual:
Payout the ballon at the end of the term
Refinance the balloon
Trade in or sell the asset to cover the cost of the balloon
You might choose to have a balloon payment if you prefer to keep repayments lower for cash-flow purposes.
Most lenders have maximum residuals as per the below, however, you can choose less than the maximum recommended.
3 Years – 50% balloon
4 years – 40% Balloon
5 years – 30% Balloon
Fees to set up a Chattel Mortgage
Each lender is different in terms of how much the establishment fee will be.
You will get charged an establishment fee which is generally $400-$500 and sometimes a PPSR Fee – many lenders will absorb the PPSR Fee into the cost of the establishment fee. Some lenders have no establishment fee’s though these might have higher interest rates.
A PPSR is a security charge over the asset (Chattel).
Having a good finance broker assist you in finding the right finance solution for your business is important so you get the right lender with the best rates and the best fees for your requirements.