Understanding Chattel Mortgage vs Hire Purchase
Read time: 16 min
A chattel mortgage is a common form of equipment finance used by Australian businesses to purchase vehicles, machinery and other business assets. The business owns the asset from settlement while the lender registers security over it until the finance has been repaid.
Hire purchase and rent-to-own work differently because ownership generally remains with the finance or rental provider during the agreement and transfers later, depending on the terms of the contract.
For an Australian business comparing equipment financing options, the main questions are when you own the asset, how repayments are structured, what happens at the end of the agreement and how the structure affects cash flow and tax treatment.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for commercial vehicles, machinery and business equipment. Hire purchase and rent-to-own are included in this guide for comparison so business owners can understand how the structures differ.
What Is a Chattel Mortgage?
A chattel mortgage is a commercial loan used to purchase a business asset.
The "chattel" is the asset being financed, such as:
- A truck
- Excavator
- Skid steer
- Tractor
- Trailer
- Ute
- Van
- Forklift
- Manufacturing machine
- Other commercial equipment
Under a chattel mortgage:
- Your business purchases the asset
- Your business owns it from settlement
- The lender provides the finance
- The lender registers security over the asset
- You make agreed repayments over the finance term
- A deposit or trade-in may be included
- A balloon payment may be available
- The lender removes its security once the finance has been repaid
The important point is that the business owns the equipment from the beginning.
How Does a Chattel Mortgage Work?
Consider a business purchasing a $150,000 excavator.
The business may decide to contribute a $20,000 deposit and finance the remaining $130,000.
The finance could then be structured around:
Equipment purchase price: $150,000
Deposit: $20,000
Amount financed: $130,000
Finance term: Agreed with the lender
Balloon: Optional, subject to lender criteria
Repayments: Structured according to the approved finance
The excavator belongs to the business from settlement.
The lender holds security over it while the loan remains outstanding.
Once the finance is repaid, the lender's security is removed.
Why Do Businesses Use a Chattel Mortgage?
A chattel mortgage allows a business to buy an income-producing asset without necessarily paying the full purchase price from cash upfront.
That can help preserve working capital for expenses such as:
- Wages
- Fuel
- Suppliers
- Insurance
- Registration
- Maintenance
- Repairs
- Stock
- Project costs
- Tax commitments
- Unexpected expenses
The business pays interest for using finance, so the decision should balance the cost of borrowing against the value of keeping cash available inside the business.
Chattel Mortgage vs Hire Purchase: What Is the Difference?
The main difference is ownership.
With a chattel mortgage, the business purchases and owns the asset from settlement.
Under a traditional hire purchase agreement, the finance provider generally owns the asset during the agreement. The business uses the equipment and makes agreed payments, with ownership transferring according to the contract after the required payments have been completed.
Chattel Mortgage
The business:
- Owns the asset from settlement
- Borrows money to purchase it
- Makes finance repayments
- Keeps the asset once the loan is repaid
Hire Purchase
The business generally:
- Uses the asset during the agreement
- Makes hire purchase payments
- Does not own the asset from the beginning
- Takes ownership according to the agreement after the required payments are completed
The exact terms of a hire purchase agreement can vary.
TAFS focuses on chattel mortgage finance rather than hire purchase.
Chattel Mortgage vs Rent to Own
Rent-to-own uses another ownership structure.
Under a typical rent-to-own arrangement, the provider owns the asset during the rental period. The business makes payments for the use of the equipment, and ownership may transfer later if the conditions in the agreement are satisfied.
With a chattel mortgage, ownership starts immediately at settlement.
Chattel Mortgage
The business owns the equipment while repaying the finance.
Rent to Own
The provider generally owns the equipment during the rental period, with the possibility of ownership transferring later.
That difference can be important for a business that knows it intends to own and keep the asset for the long term.
TAFS focuses on chattel mortgage finance. Rent-to-own is included here only to explain the difference between the structures.
Chattel Mortgage vs Hire Purchase vs Rent to Own
|
Feature |
Chattel Mortgage |
Hire Purchase |
Rent to Own |
|
Business owns asset from settlement |
Yes |
Generally no |
Generally no |
|
Initial owner |
Business |
Finance provider |
Provider |
|
Regular payments |
Finance repayments |
Hire purchase payments |
Rental payments |
|
Ownership at end |
Business already owns asset |
Generally transfers under agreement |
May transfer under agreement |
|
Lender/provider interest in asset |
Lender registers security |
Provider generally owns during agreement |
Provider generally owns during rental period |
|
Balloon may be available |
Yes, depending on lender |
Depends on agreement |
Depends on agreement |
|
Primary structure arranged by TAFS |
Yes |
No |
No |
The legal, accounting and tax treatment of each individual agreement can vary.
Speak with your accountant before choosing a finance structure based on tax outcomes.
Is a Chattel Mortgage Tax Deductible in Australia?
Parts of a chattel mortgage transaction may be deductible, but the full repayment should not simply be treated as one tax deduction.
A chattel mortgage repayment normally contains:
- Principal
- Interest
The principal reduces the amount borrowed.
Eligible interest relating to business use may potentially be deductible.
Because the business owns the asset, depreciation may also apply under the relevant tax rules.
A GST-registered business may also be able to claim an eligible GST credit on the business-use portion of the purchase where the requirements are met.
Your accountant should confirm the treatment that applies to your business.
Is Chattel Mortgage Interest Tax Deductible?
Eligible interest may potentially be deductible where the finance relates to an income-producing business asset.
For example, if a transport business finances a truck entirely for business use, the eligible interest component may form part of its business deductions.
This is separate from repayment of the principal.
Is the Whole Chattel Mortgage Repayment Deductible?
Generally, no.
Consider a monthly repayment of $3,000.
That repayment does not automatically mean the business receives a $3,000 tax deduction.
Part of the payment may represent:
- Principal
- Interest
The principal reduces the outstanding debt.
Eligible interest may potentially be deductible.
The asset itself may be dealt with separately through depreciation or other applicable tax rules.
Can You Claim Depreciation on an Asset Financed With a Chattel Mortgage?
Potentially.
Because the business owns the asset, eligible depreciation may apply according to the tax rules relevant to that business and asset.
The finance term and depreciation treatment are separate.
For example, a truck might be financed over five years, but that does not mean its tax depreciation automatically follows the same five-year schedule.
Your accountant should calculate the appropriate treatment.
Can You Claim GST on a Chattel Mortgage?
A GST-registered business may potentially claim an eligible GST credit on the business-use portion of the asset purchase where the normal requirements are satisfied.
The GST position can depend on factors such as:
- Whether the business is registered for GST
- Business-use percentage
- Whether GST was charged on the purchase
- Whether the seller is registered for GST
- Whether the required tax documentation is available
For example, a dealer purchase may have a different GST position from equipment purchased from a private seller.
Does a Balloon Payment Change the Tax Deduction?
A balloon payment changes the finance structure.
It does not automatically create an additional tax deduction.
A balloon leaves an agreed amount of principal outstanding at the end of the finance term.
For example:
Amount financed: $150,000
Finance term: 5 years
Balloon: $30,000
The regular repayments are generally lower than they would be without the balloon because $30,000 remains outstanding at the end.
The balloon itself is not automatically an extra deduction simply because it is paid later.
Does a Bigger Balloon Mean a Bigger Tax Deduction?
Not automatically.
A larger balloon may reduce the regular repayment and can change the amount of interest paid over the finance term.
It does not by itself increase the depreciation available on the asset or create an additional deduction.
A balloon should be selected based on:
- Business cash flow
- Asset value
- Expected future value
- Finance term
- How long the business expects to keep the asset
Does a Deposit Affect Chattel Mortgage Tax Treatment?
A deposit mainly changes how much money the business needs to borrow.
For example:
Equipment price: $120,000
Deposit: $20,000
Amount financed: $100,000
Increasing the deposit can reduce:
- Amount financed
- Regular repayments
- Interest cost
But it also means using more business cash upfront.
The tax treatment of the equipment itself should be considered separately from the amount borrowed.
Is a Chattel Mortgage Better Than Hire Purchase?
There is no universal answer for every business.
The structures work differently.
A chattel mortgage may suit a business that wants to:
- Own the equipment immediately
- Keep the asset long term
- Spread the purchase cost over time
- Preserve working capital
- Use a deposit or trade-in
- Potentially structure a balloon
- Purchase an income-producing business asset
Hire purchase has a different ownership model because the provider generally owns the equipment during the agreement.
Businesses considering hire purchase should review the actual agreement and obtain accounting advice before making a decision based on tax treatment.
TAFS primarily arranges chattel mortgage finance.
Is a Chattel Mortgage Better Than Rent to Own?
It depends on what the business wants from the equipment.
For a business purchasing an asset it expects to keep, ownership from settlement can be an important consideration.
A chattel mortgage may suit a business that wants to:
- Own the equipment immediately
- Use it as a long-term business asset
- Spread the purchase price over time
- Retain more working capital
- Have flexibility around deposit and balloon structure
Rent-to-own generally means the provider retains ownership during the rental period.
The business needs to check what happens at the end of the agreement and whether ownership transfers automatically or only after additional conditions are satisfied.
What Equipment Can Be Financed With a Chattel Mortgage?
A chattel mortgage can be used for many types of commercial assets.
Trucks and Transport Equipment
This can include:
- Prime movers
- Rigid trucks
- Tippers
- Refrigerated trucks
- Crane trucks
- Tilt trays
- Trailers
- Vans
- Utes
Earthmoving and Construction Equipment
This can include:
- Excavators
- Skid steers
- Posi-tracks
- Loaders
- Rollers
- Graders
- Dozers
- Attachments
Agricultural Equipment
This can include:
- Tractors
- Harvesters
- Headers
- Seeders
- Implements
Manufacturing and Commercial Equipment
This can include:
- CNC machines
- Lathes
- Forklifts
- Fabrication equipment
- Packaging machinery
- Production equipment
- Other business assets
New and used assets may be financed subject to lender criteria.
Can Used Equipment Be Financed With a Chattel Mortgage?
Yes.
Selected lenders can provide chattel mortgage finance for used commercial vehicles, machinery and equipment.
The lender may consider:
- Equipment age
- Condition
- Kilometres or operating hours
- Purchase price
- Market value
- Remaining working life
An older asset may have a shorter available finance term than newer equipment.
Can You Use a Chattel Mortgage for a Private Sale?
Potentially.
Selected lenders can finance assets purchased from private sellers.
Additional checks may be required around:
- Seller identity
- Ownership
- VIN or serial number
- Existing security
- Purchase price
- Market value
- Condition
The finance structure can still be a chattel mortgage.
Can You Finance Auction Equipment With a Chattel Mortgage?
Potentially.
Selected lenders can finance eligible assets purchased at auction.
It can be useful to have the finance position assessed before bidding so the business understands:
- Approximate finance capacity
- Deposit requirements
- Acceptable equipment age
- Finance term
- Lender conditions
Final approval depends on the asset purchased.
Can Sole Traders Use a Chattel Mortgage?
Yes.
A sole trader can use chattel mortgage finance for eligible business vehicles and equipment, subject to lender approval.
The lender may assess:
- ABN history
- Industry experience
- Business bank statements
- Existing finance
- Credit position
- Business income
- Asset being purchased
Can a New ABN Get a Chattel Mortgage?
Potentially.
Selected lenders can consider newer businesses.
Where the ABN has limited history, the lender may place more weight on:
- Previous industry experience
- Current work
- Contracts
- Bank statements
- Credit history
- Deposit
- Available working capital
- Asset value
There is no single minimum ABN age across every commercial asset finance lender.
Do You Need a Deposit for a Chattel Mortgage?
Not always.
Deposit requirements depend on:
- Business history
- Credit profile
- Asset
- Purchase price
- Asset age
- Amount financed
- Existing commitments
- Lender
A deposit reduces the finance amount and can reduce regular repayments.
A business should also consider how much cash it needs to retain after settlement.
Can a Trade-In Be Used?
Yes.
Trade-in equity can potentially contribute toward the purchase.
For example:
Trade-in value: $60,000
Existing finance payout: $25,000
Potential equity: $35,000
That equity may contribute toward the replacement asset and reduce the amount that needs to be financed.
How Long Does a Chattel Mortgage Run For?
The available finance term depends on the:
- Asset
- Asset age
- Purchase price
- Business
- Lender
- Expected working life
The term should suit how long the business expects to use the equipment.
Financing an older asset over too long a period can leave the business making repayments when the equipment is approaching replacement.
How Does TAFS Arrange Chattel Mortgage Finance?
TAFS primarily uses chattel mortgages when arranging finance for eligible business vehicles, machinery and equipment.
The process starts by understanding the business and the asset rather than immediately making a lender application.
1. Initial Assessment
TAFS reviews:
- Business history
- ABN age
- Industry experience
- Available documentation
- Existing finance
- Credit position
- Proposed asset purchase
2. Soft Credit Check
TAFS begins with a soft credit check that leaves no mark on the applicant's credit file.
3. Internal Credit Review
The internal credit team assesses the application before deciding which lender criteria may suit it.
4. Compare Suitable Lenders
TAFS has access to more than 80 bank and non-bank lenders.
Different lenders can have different requirements around:
- ABN age
- Asset type
- Asset age
- Low doc applications
- Private sales
- Credit profile
- Deposit requirements
5. Structure the Chattel Mortgage
TAFS can review:
- Purchase price
- Deposit
- Trade-in
- Amount financed
- Term
- Regular repayment
- Balloon
6. Submit the Formal Application
Once an option has been selected, the formal application is submitted to the chosen lender.
7. Approval and Settlement
TAFS coordinates the remaining lender and seller requirements through to settlement.
What Should You Compare Before Choosing Equipment Finance?
Before choosing any equipment financing structure, ask:
- Who owns the asset from the beginning?
- What is the purchase price?
- How much needs to be financed?
- Is a deposit required?
- Can a trade-in be used?
- What is the interest rate?
- What are the regular repayments?
- How long is the agreement?
- Is there a balloon or final payment?
- What happens at the end of the agreement?
- Does ownership transfer automatically?
- What is the total estimated cost?
- How long will the business use the asset?
- How much working capital should remain available?
- What tax treatment applies?
The structure should support the business first.
Tax outcomes should then be confirmed with your accountant.
Frequently Asked Questions
What Is a Chattel Mortgage?
A chattel mortgage is a commercial loan used to purchase a business vehicle, machine or piece of equipment.
The business owns the asset from settlement while the lender registers security over it until the finance has been repaid.
What Is the Difference Between Chattel Mortgage and Hire Purchase?
The main difference is ownership.
With a chattel mortgage, the business owns the asset from settlement.
Under a traditional hire purchase agreement, the provider generally owns the equipment during the agreement and ownership transfers according to the contract once the required payments are completed.
What Is the Difference Between Rent to Own and Chattel Mortgage?
With a chattel mortgage, the business owns the asset immediately.
With a typical rent-to-own arrangement, the provider generally owns the asset during the rental period and ownership may transfer later under the agreement.
Is a Chattel Mortgage Tax Deductible?
Parts of the transaction may be deductible.
Eligible business-use interest may potentially be deductible, while the asset may be depreciated under the applicable tax rules.
The principal component of the loan repayment is treated separately.
Speak with your accountant about your circumstances.
Is the Entire Chattel Mortgage Repayment Tax Deductible?
Generally, no.
The repayment contains principal and interest.
The principal reduces the amount borrowed. Eligible interest may potentially be deductible.
Can I Claim GST on a Chattel Mortgage?
A GST-registered business may potentially claim an eligible GST credit on the business-use portion of the asset purchase where the relevant requirements are met.
Can I Claim Depreciation?
Potentially.
Because the business owns the asset, eligible depreciation may apply under the relevant tax rules.
Is a Balloon Payment Tax Deductible?
A balloon generally represents principal remaining at the end of the finance term.
It does not automatically become an additional deduction because it is paid later.
Is Chattel Mortgage Better Than Hire Purchase?
It depends on the business and agreement.
For a business that wants ownership from settlement, a chattel mortgage provides that structure.
Is Chattel Mortgage Better Than Rent to Own?
A chattel mortgage may suit businesses that want to own an asset immediately and keep it long term.
Rent-to-own follows a different ownership model.
Does TAFS Arrange Hire Purchase or Rent to Own?
TAFS focuses on chattel mortgage finance for eligible commercial vehicles, machinery and equipment.
Hire purchase and rent-to-own are discussed here for comparison rather than as TAFS finance products.
Can Used Equipment Be Financed?
Yes.
Selected lenders can provide chattel mortgage finance for eligible used business vehicles, machinery and equipment.
Can a Sole Trader Get a Chattel Mortgage?
Yes, subject to lender approval.
Can a New ABN Get a Chattel Mortgage?
Potentially.
Selected lenders consider newer businesses based on the complete application, including industry experience, current work, credit history, available documentation and the asset being purchased.
Arrange a Chattel Mortgage With TAFS
The biggest difference between chattel mortgage, hire purchase and rent-to-own is when your business owns the asset.
TAFS primarily arranges chattel mortgage finance, allowing eligible businesses to own their vehicle, machinery or equipment from settlement while repaying the purchase over an agreed finance term.
TAFS can review the asset, purchase price, deposit, trade-in, finance term and balloon before comparing suitable options through access to more than 80 bank and non-bank lenders.
The Asset Finance Shop (TAFS) is a commercial asset finance brokerage based in Sydney.
Information on this page is general in nature and doesn't take your personal circumstances into account. Speak to a TAFS broker for options tailored to your business, and to your accountant regarding tax treatment.
