If you are on the lookout for commercial vehicle financing options, then you must surely have come across the term chattel mortgage. This loan option is purely designed for business car purchase, i.e. a car which would be used in your business for 50% of the time or more.
So, what is chattel mortgage? Is it suitable for your business? Does it offer any benefits, especially tax savings? Well, to understand the nitty-gritty, let me give you an overview of this loan arrangement.
Chattel Mortgage Definition As you can see, a chattel mortgage comprises two parts: chattel (the vehicle you are going to buy) and mortgage (the loan you would be paying back). When you purchase any asset, the ownership lies with you or your company. However, the financer places a mortgage (through a fixed and floating charge set by Australian Securities & Investments Commission) on your vehicle – thereby rendering the vehicle as security against the loan.
What is the benefit of this? It is a win-win scenario. Your lender has peace of mind that you are guaranteed to pay the loan back. And, you are entitled to lower interest rates since this is a secured loan.
Once your loan term is over and you have cleared all payments, including any balloon amount, the lender removes this mortgage – making you the sole owner of the vehicle. As a customer, you can also choose to trade in the car or refinance the residual value.
Is Your Business Suitable To Apply For A Chattel Mortgage?
The answer lies in your type of business. If your company is registered under GST on a cash basis, you can claim the GST included in the purchase price of your car. This amount depends on how much business % use you are claiming on the car. Always seek tax advice from your accountant
However, these tax benefits are eligible only when you use the car to generate income for your business. Tax refunds can be claimed on the interest charges of the loan and on depreciation of the vehicle. GST, on the other hand, is charged on the purchase value of a vehicle. No GST is charged on monthly instalments or on the balloon amount.
What Are The Additional Benefits Of Chattel Mortgage?
Chattel mortgage is a good choice for your business. How so? Let me highlight a few of its benefits:
You have a flexible range of loan terms, varying from 12 to 60 months.
You can opt for flexible balloon payment options ranging from 0% to 60%. However, factors such as age and type of vehicle will vary this.
You can also pay a deposit amount upfront to reduce the loan amount.
You are eligible for tax benefits when you use the vehicle for commercial purpose.
You benefit from input tax credits if your company is registered under GST.
Since your vehicle is kept as security, you are entitled to lower interest rates.
If your lender agrees to finance 100% of the vehicle’s value, you do not have to deplete your capital sources. As a result, you can improve your cash flow.
At times, you can finance more than the car’s value – to amortise insurance and other extra fees.
How Can You Secure A Chattel Mortgage?
The Australian lending market is packed with financial institutions such as local banks, credit unions, and brokers who can offer you a chattel mortgage for buying a commercial vehicle. You just need to choose the correct one. The mutual contract between the two parties must detail both your requirements in writing such as loan specifications, loan value, description of the chattel, and contact information. After everything is clear, you can go ahead and sign on the dotted line.
Now that you understand chattel mortgage and its various aspects, you can decide whether this loan option is suitable for you. Major factors to consider here are your tax benefits, interest rates, and business type. After analysing each aspect in detail, make the call.
If you want to research more on other available loan alternatives, do check out our blog on commercial vehicle hire purchase. We hope our article assists you in working out which financial products best suit your needs when financing a car. All the best!
Please always seek tax advice from your accountant before entering any financial product