Definition of a Chattel Mortgage

While a chattel mortgage may sound like a term used for mortgaging a house, it is car financing available in Australia. It is a source of financing for the purchase of a vehicle when a car buyer does not have enough or doesn't want to buy the car with cash in a lump sum.

How a Chattel Mortgage Works

When a car buyer in Australia wishes to mortgage the purchase of a car, the mortgage lender provides the funds for the purchase of the vehicle. In return, a mortgage or lien is placed on the vehicle by the lender while the buyer takes possession of the vehicle. The vehicle is used as collateral for the chattel mortgage, so if the buyer defaults on its payments to the lender, the lender has the right to repossess the vehicle. Once the buyer pays off the chattel mortgage, the lien or mortgage is removed from the vehicle and the lender no longer has rights to the vehicle.

Chattel Mortgage Terms

Typically, a chattel mortgage has a term of 12 to 60 months and has a balloon payment. A balloon mortgage is one where the borrower pays a monthly payment for a certain period of time (12 to 60 months). At the end of the term, the mortgage balance comes due or balloons. At this time, the vehicle owner is required to pay the total balance due, refinance the balance into a new chattel mortgage or return the vehicle to the dealer where it was purchased.

Who Uses Chattel Mortgages

Generally, buyers who use the vehicle primarily for business purposes use chattel mortgages. Primarily for business use is defined as using the vehicle for 50% or more of the time to perform business functions. Chattel mortgage financing is also beneficial to vehicle buyers who are interested in owning the vehicle at the end of the term rather than turning it back into the dealer for a new vehicle.

Benefits

There are several advantages associated with using a chattel mortgage to finance the purchase of a vehicle. When the vehicle is used for business purposes, the payments are tax deductible. The interest rate and monthly payments are fixed for the 12- to 60- month term, so vehicle buyers know what their payments will be. Because chattel mortgages are a form of leasing the vehicle, the interest rates are generally lower than other financing options. Finally, the built-in balloon payment lowers the monthly payment of the vehicle.

Tax Considerations

There are also tax considerations to take into account when using a chattel mortgage to purchase a vehicle. The monthly vehicle payments or balloon amount due at the end of the term is not subject to GST. When the vehicle is used for business, the owner of the vehicle can also claim interest and depreciation costs on their taxes up to a maximum of $57,180.