Overview of the Chattel Mortgage

Before getting into possible benefits of a Chattel Mortgage, one needs to understand the answer to the common question of;

What is a chattel mortgage?

In documents, one may see the term “CM”. This form of mortgage is a loan contract based on English law. Typical use is to buy movable personal property (or “chattel”).

The lender extends the funds for a period of time to enable this purchase by using the chattel as security. Legal ownership of the item is given to the purchaser, with the mortgage existing until the loan is repaid.

what is a chattel mortgage

In Australia, most chattel mortgages are used by companies, partnerships, and traders to fund vehicles and business equipment.

Under the national laws, it is counted as a cash purchase and entitles the buyer to claim Input Tax Credit on their following Business Activity Statement. This is in contrast to other types of loans or leases.

This form of mortgage is tailored to the purchase of “movable assets”, that is anything expensive that is easily transferred to another business.

These items usually can be resold easily. In most cases these are business machinery of various types including cars, trucks, operating machinery, and office equipment. It does not apply to real estate property, buildings, or non-movable items.

These temporary assists that have regular depreciation schedules grant a double tax write off when handled correctly. Payments on these items can be fixed to monthly or bi-weekly, and adjusted over the life of the loan through deposits, balloon payments, or other strategies.

For those companies that use cash accounting for Goods and Services Taxes, the chattel mortgage enables them to declare the full value of the item right away. Further depreciation and interest is deductible over the 1 to 5 year course of the loan.

The GST laws do not apply to this type of mortgage, which makes them very attractive. Lenders like them because few default on them because of the nature of the collateral. Should the business fail to pay the loan, the equipment is taken and resold, often at a profit.

There are some benefits to doing this. These range from increased flexibility of contract terms, placement of bulk payment can be either in the beginning of the loan or the end, payments can vary based on season, tax refunds for GST can be directly applied to payments, and interest plus depreciation can be often deducted on tax returns for items used to generate income.

Since the title of the chattel is handed over to the business like a cash purchase, the full amount of the purchase price can be used for GST tax credit.

Additionally, all of these mortgages are made for a fixed interest rate, which makes it easier for businesses to budget paying them back. Of course, there are other ways to go about getting business equipment that may be more suitable for individual situations.

Overall, for businesses, the Chattel Mortgage system outweighs other types of loans and leases. This is because you can approach the maker of the items you need with “cash on hand” and negotiate for a better price on the basis that they will get a full upfront payment for their product and not have to worry about defaulted payments.

If you are unsure, consider comparing Novated Leasing, Commercial Hire Purchasing, and Finance Leasing to Chattel Mortgage to see which has a better deal for you. You should also look at the various car loan options available.

Article written by Damian Roberton