Chattel Mortgage FAQ
What is a chattel mortgage?
A chattel mortgage is a financing option for new business vehicles.
How does a chattel mortgage work?
If you take out a chattel mortgage, a lender will provide you with the funds to buy a new car. This loan is secured against the vehicle via a mortgage. This means that the lender can repossess the car if you default on your regular loan repayments. When you have repaid the loan, the lender releases the mortgage.
What are the benefits of a chattel mortgage?
a. Interest and depreciation costs rates are usually lower than unsecured loans.
That's because the lender has the mortgage over the vehicle as security. This means that there is less risk to the lender than if you took out an unsecured personal loan.
b. You can set up a repayment term to suit your business purposes
Typical mortgage a chattel terms range from two to seven years.
c. You can also set up the repayment frequency to suit your business' cash flow.
For example, you can choose weekly, fortnightly or monthly. You can also structure your repayments to suit your business' seasonal cash flow.
d. You can choose a fixed interest rate to ensure certainty of your repayment amount.
You can also choose a variable claim interest rate option if you'd prefer.
e. You can lower your regular monthly repayments by arranging a larger final payment.
This larger final payment is called a "balloon" or residual value payment. For example, you might borrow $20,000 over 5 years with monthly repayments of $360 and a final balloon payment of $5,000. When it comes time to make the final payment, you can choose to refinance the vehicle or trade it in instead.
f. You can save tax
You can claim the goods and services tax (GST) on your vehicle's price if your business is registered for GST. You can do this by claiming your car's GST as an input tax credit on your business activity statement (BAS).
You’ll also be able to claim the interest and fees on your chattel mortgage as input tax credit deductions. Your business-use vehicle expenses will also be tax-deductible. For example, expenses like petrol, registration, insurance and servicing costs. You’ll also be able to claim depreciation on the vehicle’s value.
What is the difference between a chattel mortgage and a novated lease?
There are some key differences, including:
a. Due to their tax advantages, Chattel Mortgages tend to be more popular with business owners and employees who use their car for predominantly business use. Novated leases are often used by employees who do not use their vehicle over 50% of the time for business purposes.
b. You own the vehicle with a chattel mortgage. With a novated lease, you usually have the option to buy, upgrade, or continue the lease when the term expires. The end of term buy price can be high.
c. Novated lease payments are subject to fringe benefits tax (FBT).
The FBT rate in Australia is currently 47%.
d. Vehicle running costs can be packaged into the repayments with a novated lease.
This means that novated lease repayments will be higher.
e. You can salary sacrifice and make your novated lease payments out of your pre-tax salary.
This can be a tax-effective strategy.
What is the difference between a chattel mortgage and a hire purchase arrangement?
The fundamental difference relates to ownership. You are the owner of your vehicle under chattel mortgage financing. Your lender can only repossess your vehicle or your business equipment finance if you default on your repayments.
Your lender retains ownership of the vehicle during a hire purchase arrangement. At the end of the period, you have the option to buy the car.
Are you considering taking out a professional tax advice in chattel mortgages? Australian credit licence business loan? Have any further questions? Call Auto Car Loans today on 1300 301 051 for some friendly impartial advice.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.