When it comes to sourcing finance, motorists have a variety of avenues to seek credit. One of the less common forms, mostly because it is restricted to business use, comes courtesy of chattel mortgages. They might sound like they have something to do with your home, but what exactly are chattel mortgages?
First things first, it’s important we reemphasise that chattel mortgages are not valid for personal use, they are instead restricted to business undertakings. While one might assume this means just companies or businesses, it also extends to partnerships and sole traders. Nevertheless, a vehicle which is the subject of a chattel mortgage must be predominantly used for work purposes.
With that said, chattel mortgages are defined as “a mortgage on a moveable item of property”. In this context, property is defined as a possession rather than the housing assets we’ve become obsessed with in recent years!
The mechanics of a chattel mortgage include an application for the loan, which once approved sees the lender purchase the vehicle on behalf of the applicant. The applicant will be listed as the owner of the car and will be required to make ongoing payments. It goes without saying that only once an applicant has paid off the debt in full do they attain complete ownership of the asset. Financiers seek to protect themselves by nominating the vehicle as security against the loan.
As well as acquiring complete possession of the vehicle once repayments have finished, business owners also have other options as they approach the end of their financing obligations. For starters, they may choose to refinance the vehicle based on its residual value. Alternatively, some lenders may facilitate a trade-in of the vehicle, allowing a motorist to switch to a newer car.
While the underlying prerequisite for a chattel mortgage is the majority portion of the vehicle’s use being for business purposes, business owners also need to assess their operating circumstances. Considering this in further detail, chattel mortgages often favour businesses which follow cash accounting principles and account for GST on a cash basis. Therefore, they can make an immediate claim for the GST component of the vehicle’s retail price as an Input Tax Credit.
Interest rates are typically less than those of other financing methods, which stems from the fact the asset is secured against the loan. What’s more, an initial deposit against the vehicle can reduce liabilities associated with the loan. The structure of a chattel mortgage also varies from one lender to the next, but with this variability comes the opportunity to attain payment terms and a loan duration that could be more favourable to a business than other loans. Last but not least, one of the most beneficial aspects of the loan is that payments can be deducted during tax time – although again, you’ll be expected to prove the vehicle has been used for work purposes more than half of the time.