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January 6, 2021● 5 minute read●
You may have run into the term chattel mortgage on a few occasions, but you might still find yourself unfamiliar with its definition, or what it fully entails. It’s not unlikely that you would have run into this term at least once or twice, especially if you’re trying to purchase a vehicle for your company. Well, in this article we’ll be shedding more light on what it is, who is eligible to get it, and how it might be the solution you need.
What does this term mean?
A chattel mortgage is quite similar to the standard mortgage, in that it allows you to purchase a large item without making a colossal payment all at once. But there is a difference, here, the financier loans you a specific amount of money which you use to buy the chattel (the asset in question), and record it as part of their PPSR. PPSR stands for Personal Property Securities Register, and it means the lender acts as a sort of guarantor, till you can ultimately pay off the loan, can claim full ownership of the chattel.
Another way chattel mortgages differ from traditional loans is that other types of loans are usually for private use, hence the term personal loan. On the other hand, a chattel mortgage is primarily for business use. Personal loans may also apply to homes, education and events such as weddings, but chattels usually refer to portable equipment like cars or trucks.
Who is eligible for it?
As we mentioned earlier, the primary reason most people take out this type of finance is to acquire assets for their business. If you’re a small business owner, this sort of mortgage pays you because it often affords the owner more flexibility with their payments. But it’s not only for small businesses, but you might also benefit from a chattel mortgage if you’re a large-scale sole proprietor, a partnership or a company.
What are the benefits?
There are several reasons you might look into getting a chattel mortgage. Many of them use a fixed interest rate, so the repayments are equal across the duration of the loan. You also don’t need to make large down-payments, and some of them are tax-deductible. Let’s look at these incredible benefits in detail:
Low-interest rates: The state requires lenders to register any chattel mortgage they approve as part of their Personal Property Securities Register (PPSR), so in that way, the vehicle is already secure. That’s great news for you because it means you don’t have to cough up the same amount as you usually would for an unsecured loan.
Flexible repayment schedule: Owners have the option of customizing their payment plan to suit them. You can decide to make a balloon payment at the end of the duration of your loan so that you can reduce the monthly instalment amount. Or you can opt to spread the reimbursement equally across the length of the loan. Whichever one you choose, you must note that with the first option, you’ll pay higher interest throughout the loan. There’s also the option of including extra payments as you deem fit. Plus, you can also pay for an insurance premium of the vehicle, even while it is on a mortgage. So that means in the event of an accident, you can still receive reimbursement from the insurance company even on a chattel mortgage.
No monthly fees: With consumer loans, you have to take into consideration their ongoing fees and other charges for application, establishment and so on. But chattel mortgages require nothing of that sort and don’t include such costs. You can start paying off your loan immediately without weighing how much of it is account keeping fees. So apart from the interest rate, you don’t need another variable to decide on a lender, unlike personal loans that require you to use the regular interest rate, comparison rate, and other charges to choose.
It is tax-deductable: When you have a chattel mortgage, you can legally claim the interest component of the repayments and the depreciation on the vehicle as tax deductions. But that’s only in the instance that you use the car to generate assessable income.
Repayments are exempt from GST: Yet another fantastic advantage of taking out a chattel mortgage is that you can claim GST and other depreciations. So if you’ve already registered for GST, on your next Business Activity Statement (BAS), you’re legally allowed to add the value to your vehicle purchase price. You can even do more research to find out if you qualify to reclaim the entire input tax credit.
Are there any disclaimers?
They are not regulated
So far, chattel mortgages look rosy with their lower interest rate and more flexible options. But before you decide to start researching lenders that offer such finances, it’s crucial to note that they are not regulated. What does that mean, you might be wondering? Well, regular loans which the National Consumer Credit Protection Act (NCCP) regulates protect borrowers from predatory lending. It also offers a kind of safety net against limited offers that might trap a desperate borrower. Without NCCP checks, lenders can loan money to individuals who they very well know aren’t capable of paying back. Due to the lack of regulation with this sort of option, you should speak with an accountant before proceeding.
There’s little room for early termination.
Sometimes you have an extra stash of cash, maybe your projected profits were higher than expected, or you found another source of income. You might think it’s a good idea to use some of the money to pay off your mortgage faster, right? Well, not exactly. You see because lenders aren’t regulated, they don’t have to display their exit fees. Sometimes their early exit fees cost you more than if you had stuck to the schedule you already planned out.
You stand to gain a lot from taking out a mortgage on your movable assets. It’s a fast, and relatively cheaper way to acquire such assets without the hassle of monthly fees, and with a lot more flexibility. Still, it’s in your best interest to fully understand the terms of any agreement before proceeding.
Written by Jacaranda Team