Chattel Mortgage or Finance Lease?

  • 10 October, 2018
  • Sharon Piening

A question I am often asked by clients is, “What is a Chattel Mortgage and how is it different from a Finance Lease?”

A Chattel Mortgage and a Finance Lease are both finance products typically used by businesses to acquire:

  • Business equipment
  • Motor Vehicles

How a Chattel Mortgage is different from a Finance Lease

The main way a Chattel Mortgage differs from a Finance Lease is ownership of the asset.

With a Chattel Mortgage, the lender advances the borrower the money to buy the asset and registers a “mortgage” over the asset as security for the loan.

When the loan is fully repaid, the charge is removed, and the client has clear title to the asset.

How a Finance Lease is different from a Chattel Mortgage

With a Finance Lease, it is the Financier who owns the asset.

The client then “leases” or “hires” the asset from the Financier for a fixed monthly payment over a set period of time.

At the end of the contract the client usually has the option to purchase the asset for an agreed price.

Whilst at face value the products are similar, there are differences:

Chattel Mortgage

  • The client owns the Asset
  • Purchase Price includes GST
  • Can include a Balloon to reduce monthly payments
  • Able to make an upfront deposit to reduce amount financed
  • Interest and Depreciation may be tax deductible
  • When the loan is repaid in full the client gets clear title to the asset
  • No GST is charged on monthly repayments or the contract Balloon amount
  • Clients registered for GST can claim the GST Input Tax Credit in the purchase price on their next Business Activity Statement
  • Balloon Payments range from 0% to 60%

Finance Lease

  • The Financier owns the asset
  • The Financier claims the GST input which means the amount financed is lower
  • Predetermined Residual at the end of the term
  • Unable to make an upfront deposit to reduce amount financed
  • Lease Payments may tax deductible
  • Client usually has the right to purchase the asset at the end of the contract
  • GST is charged on monthly repayments and the Residual
  • Clients registered for GST may be able to claim the GST on monthly payments and Residuals in their next Business Activity Statement
  • Residual governed by ATO guidelines

Ownership & GST are the main considerations

As stated previously, the main difference between these two financing options is ownership of the asset and the tax implications flowing from that.

Most business owners these days will choose a Chattel Mortgage as:

  • It provides ownership of the asset from the time of purchase
  • Those registered for GST can claim the full Input Tax Credit on the purchase price, in their next Business Activity Statement
  • No GST is payable on the monthly repayments, or any Residual payment

Choosing the wrong product can be expensive!

At face value, the two products may seem similar, however it is important the right product and structure are chosen as they can be expensive to unwind!

Also, how financiers quote can vary widely. A great headline interest rate may mask a higher overall cost of finance! It is critical to ensure you are comparing “apples with apples”

If you would like guidance to choose the right product (and get a great quote with “no smoke & mirrors”) don’t hesitate to give me a call!