Chattel Mortgage or Finance Lease?

Checklist The Difference Between A Chattel Mortgage And Finance Lease

10/10/2018
Sharon Piening
Equipment Finance, Motor Vehicle Finance

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:

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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!

0433 210 353

Sharon Piening

Sharon Piening

Highly experienced Equipment and Motor Vehicle Finance Specialist. I love working with my clients and helping them navigate the complex world of equipment and motor vehicle finance.

Sharon Piening is a credit representative (474698) of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237)