Understanding Finance: Chattel Mortgage

With interest rates at current low levels, it could be a good time for you to consider a major purchase – car, cargo trailer financing, truck, boat or equipment finance to grow your business. Many people take a lot of time considering the details of what they are purchasing but not the same effort understanding how they purchasing that asset.

Different types of commercial finance offer distinct benefits depending on your business structure. Understanding the type of finance options and making the right decision can be significant in terms of cost savings over the term of the loan.

How often have you just signed the finance contract without reading and fully understanding the fine print? Many people do. They look at the monthly repayment, the balloon, the loan term and if they suit, they sign. Your Jade Finance Broker will explain the details of each to you and you should always consult with your accountant. But to give you the heads-up, we’re providing an overview of different types of finance. In this issue we’re focusing on Chattel Mortgage.

Chattel Mortgage: Explained

Chattel Mortgage Equipment is the most popular and commonly selected type of commercial finance product as it suits many businesses that use a cash accounting method - self-employed, SMEs and large corporations.

‘Chattel’ is an old world  word which refers to goods or possessions. In finance terms, it refers to the asset or the item you are purchasing. ‘Mortgage’ is the claim the lender puts on the loan. The lender takes a mortgage over the chattel while the borrower makes the repayments.

A Chattel Mortgage works like this: the lender (bank or finance company) provides the finance for the purchase of the asset and holds a mortgage over the purchased equipment while the borrower, you, makes monthly repayments.

When the purchase is made, the borrower takes ownership of, and has full use of, the asset while the lender holds security for the finance until all payments are finalised.

While Chattel Mortgage is a commercial finance product, both individuals and businesses can take on a Chattel Mortgage. But, in the case of individuals, the asset being purchased – truck, car, or Commercial Equipment – must be used primarily for business purposes.

Features of a Chattel Mortgage

Your Jade Finance Broker will structure your Chattel Mortgage to suit your business objectives, starting with our signature low interest rates.

  • The interest rate is fixed for the duration of the loan.
  • A monthly repayment is established in consultation with you and this is fixed for the term of the loan.
  • Monthly payments are not tax deductible. Only the interest component of the payment is tax deductible.
  • The term of the loan is fixed and depending on what you are purchasing can vary from 2 to 6 years.
  • The lender does not require a deposit, though the seller may require some form of security/holding deposit to confirm your purchase while you are arranging your finance.
  • A balloon or residual amount may be included in a Chattel Mortgage. This can be set at a fixed dollar amount or percentage of the purchase price and is due after the final monthly repayment.
  • While it is tempting to request a large balloon to reduce the monthly repayments, you should take into account the estimated value of the asset when it comes time to finalise the loan.
  • If you are registered for GST, you can claim the GST on the full purchase price on your next BAS. GST is not charged on the interest on the loan but is charged on any fees.
  • At the end of financial year, the depreciation on the asset can be accounted as a tax deduction.
  • If you choose to finalise your Chattel Mortgage before the end of the loan term, extra costs are often incurred. The lender will give you a ‘pay-out figure’ on request.

Sourcing a Chattel Mortgage

Your Jade finance consultant will discuss the details of all our commercial finance products and advise that you consult your accountant for direction in regard to your specific business. The decision as to whether a Chattel Mortgage is the best option depends on how your business treats GST, tax deductions, depreciation, and the balance sheet. Additionally, they can also recommend reputable equipment finance brokers if needed.

Chattel Mortgage is a flexible and highly workable finance option for many businesses as it suits the purchase of a diverse range of products and equipment.

If you’re considering a business purchase, please call a Jade consultant for a confidential, non-obligation discussion in regard to a Chattel Mortgage for your purchase.