What is a chattel mortgage?

A chattel mortgage is a type of secured business loan that allows businesses to finance the purchase of assets. Like a conventional fixed-rate mortgage that you might use to buy a home, a chattel mortgage lets business owners use the asset they’re financing as the security against the loan.

In this article, we explain how chattel mortgages work, their key benefits, and how they can help your business finance its next asset purchase.

Key points:

• What is a chattel mortgage?
• How does a chattel mortgage work?
• Why do businesses use chattel mortgages?
• How chattel mortgages compare to other financing options?
• How ANZ can help with a vehicle and equipment loan

What is a chattel mortgage?

A chattel mortgage can give your business the funds it needs to purchase essential assets without the need to make a large up-front payment. The types of assets that can be purchased with a chattel mortgage include (but are not limited to) new cars, machinery (for example, earthmoving machinery) and office equipment.

Chattel mortgages are sometimes known by different names including ‘vehicle or equipment loans’, ‘goods loans’ or ‘asset loans’.

What makes chattel mortgages unique is that the asset you purchase, with the money you borrow, is used as security against the loan. This means you don’t have to put up any other collateral – although personal guarantees may be required from company directors.

This arrangement also means your chattel mortgage provider can, in most cases, finance 100% of the asset’s purchase price and match your repayments to the working life of the asset.

How does a chattel mortgage work?

Taking out a chattel mortgage (vehicle or equipment loan) is typically an easy process:

• Your business identifies the asset it needs to purchase.
• Your lender then provides the funding.
• Your business purchases the asset and takes immediate ownership.
• Your lender takes a chattel mortgage security over the asset.
• Your business makes ongoing repayments.
• Once your last repayment is made, your business will own the asset outright.

Depending on the type of business you own, and the asset you purchase, you may also be able to claim interest on your chattel mortgage, as well as depreciation of the asset you purchased, come tax time. Make sure you speak to a qualified tax professional for advice.

Why do businesses use chattel mortgages?

Chattel mortgages have many features that make them attractive to small businesses.

Under a chattel mortgage arrangement, you’ll take ownership of your new vehicle or asset from the outset of your agreement with your lender. Chattel mortgages also offer flexible repayment terms. For instance, with an ANZ vehicle and equipment loan you can structure your repayments over a range of periods (typically between one and seven years) or agree to a balloon payment option that reduces your regular repayments in exchange for a larger, one-off payment at the end of the loan period.

They can also be used to purchase a wide range of assets, providing 100% of the value of the asset without the need for additional tangible security.

Chattel mortgages are also predictable, with interest rates on repayments typically fixed for the length of the loan.  A fixed-rate car loan gives cash flow certainty, but fixed rates may not suit everyone.^disclaimer

Balloon payments explained

A balloon payment is a lump sum owed at the end of your loan term after all regular repayments have been made.  There are options for managing a balloon payment, including paying the balloon out, or applying to refinance the balloon amount (subject to credit assessment). A balloon payment may improve business cash flow but can mean paying more in interest because the principal sum isn’t being paid down as quickly.

You can talk to us about these options.

Chattel mortgage benefits:

• Preserve your working capital: With 100% of the asset’s purchase price funded (where possible) with a chattel mortgage loan, you can put your working capital to better use elsewhere.
• Easier cash flow management: Match your repayment terms to your income flow for even greater cash flow flexibility.
• Tax deductibility: Depending on your business and the assets you purchase, you may be able to claim tax deductions on your interest repayments or depreciation on your assets.

How chattel mortgages compare to other financing options

Chattel mortgage versus hire purchase

Ownership

Chattel mortgage: You own the asset from the commencement of your agreement and the lender holds a chattel mortgage security.

Hire purchase: You rent the asset and only take ownership after making your final repayment.

Security

Chattel mortgage: The asset you purchase using the chattel mortgage serves as collateral for the loan and personal guarantees may also be required from company directors.

Hire purchase: The asset is used as security, but your lender retains ownership. Personal guarantees may also be required from company directors.

Repayment terms

Chattel mortgage and hire purchase options both offer: Flexible repayment terms with the option of a balloon payment and a term typically between one and seven years.

Chattel mortgages versus leasing

Ownership

Chattel mortgage: You own the asset from the commencement of your agreement and the lender holds a chattel mortgage security.

Leasing: You don’t own the asset, the lender owns the asset Instead, you pay for the right to use it for a set period.

Potential tax benefits

Chattel mortgage: Interest and depreciation costs may be legitimate tax deductions – speak with a qualified tax professional for more information.

Leasing: Lease payments are typically tax deductible – speak with a qualified tax professional for more information.

End-of-loan terms

Chattel mortgage: Choose to make your balloon payment (if applicable), refinance your chattel mortgage, or sell the asset off.

Leasing: At the end of your lease, can choose to return the asset to the lender, enter into a new lease or upgrade to a new asset.

Flexibility

Chattel mortgage: Chattel mortgages provide greater flexibility when it comes to making repayments in addition to the benefits of ownership. Always remember that the interest rate is fixed, so early repayment fees and charges may apply.

Leasing: Leasing provides greater flexibility when upgrading your assets. As you don’t own your asset, it’s easier to trade up as needed.

How ANZ can help

ANZ’s chattel mortgage product is a vehicle or equipment loan, which can help your business buy the assets it needs to grow. You can get a quote or book an appointment to speak with an ANZ business banking specialist using the link below or apply for business vehicle loan financing today via ANZ GoBiz.

• Vehicle and Equipment Finance | ANZ