Have you ever wondered what type of mortgage you need for movable personal property, like a manufactured home, a vehicle, or a large piece of machinery?
Instead of a traditional mortgage, you’ll need to secure what is known as a chattel mortgage.
This is a different type of mortgage from the traditional property mortgage you use for immovable assets like land or real estate.
The process of securing a chattel mortgage can be quite difficult to comprehend for budding sole proprietors.
However, understanding this type of mortgage is essential if you want to purchase movable personal property smoothly.
This article will help you gain a better understanding of the basics behind a chattel mortgage and how they operate in the Australian market.
Let’s get started!
A chattel mortgage is a loan that’s secured against a movable asset. This asset class can vary as long as it’s deemed movable, such as a car, a movable property, or a large piece of equipment.
In addition, the term “chattel” refers to any movable property that can be used as collateral for said loan. This type of loan is mostly used in the business sector, primarily for industries that require expensive vehicles and equipment.
Basically, a chattel mortgage involves a borrower pledging their money in the form of a loan to own an asset. The lender holds a security interest in the asset until the borrower fully repays the loan. Once the loan is fully paid, the borrower gains full ownership of the asset.
The main difference between a chattel mortgage and a traditional mortgage is that traditional mortgages are used to finance immovable properties such as houses or land. With a traditional mortgage, the lender has a legal claim on the property until the borrower repays the loan.
On the other hand, a chattel mortgage is secured by movable assets that can be repossessed by the lender in case the borrower defaults on the loan. Chattel mortgages usually have short-term repayment periods ranging from a few months to several years.
“Chattel mortgage” is a commonly used term to refer to business loans that involve movable property. That said, there are quite several other terms that are used interchangeably with it.
Here are some of them:
Regardless of these different terms, the idea remains the same: all these terms refer to a loan procured by the borrower to secure movable assets like trucks and equipment.
There are many different types of chattel, and understanding each of them can help lead you to make the best business decision.
Here are some of the most common types of chattel:
At the end of the day, what’s deemed chattel will be determined by your lender. Some firms may consider various types of chattel appropriate, while others may not want to use it for that transaction.
Regardless, the above list should give you a clearer picture of the different types of chattel. With it, you can make more informed decisions.
Once you’ve finished paying off the mortgage entirely, you get to keep the asset. For example, if you’ve been paying for a vehicle, the lender will delist the vehicle from the Personal Property Securities Register (PPSR) and grant you complete ownership.
This means you can do anything with the vehicle. Whether you plan to sell the car, lease it, or use it for business activities, your lender won’t be able to stop you.
The good news is that almost anyone can apply for a chattel mortgage, even if you have a low credit score or a bare financial background.
That said, it still pays off to have a somewhat decent credit score. To qualify for a chattel mortgage, having a credit score around the ballpark of 575 would be advantageous. In contrast, you’ll need a credit score of 620 for traditional mortgages.
That said, the credit scores above are just loose standards. Borrowers with a credit score lower than 500 may be required to pay a higher down payment (like 10%) to compensate for their lacklustre financial status, whereas others higher along the spectrum won’t need to pay as much.
Many institutions offer chattel mortgages and provide various payment plans for the borrower. For instance, most banks and credit unions offer chattel mortgage plans for interested individuals.
You can start asking around your local financial institutions for quotes, or browse online for financial lending companies.
Besides the eventual ownership of the movable property, opting for a chattel mortgage plan comes with a lot of benefits.
Here are five advantages of applying for a chattel mortgage.
1. Better loan terms on average
Some chattel mortgages typically have lower overall rates than other types of loans, such as car loans. In addition, these mortgages run at significantly shorter terms than traditional mortgages, so monthly repayments are also less in the long run.
These all equate to higher potential money-saving in the long run due to lesser overall fees.
2. Easier to obtain than traditional mortgages
As mentioned earlier, chattel mortgages are easier to obtain than traditional mortgages because they don’t require the same level of creditworthiness.
This makes them a great option for people who may not have a high credit score or who are self-employed. So, if you’ve been worried about being turned down for a bigger loan, you can always apply for a chattel mortgage to jumpstart operations instead.
3. No need for large down payments
When you take out a chattel mortgage, you typically don’t need to make a large down payment like you would with a traditional mortgage. This is because of the nature of the asset class.
Purchasing vehicles and machines may be costly, however, the cost of these items pales in comparison to that of owning a commercial building or buying land. Consequently, these assets don’t require as large a down payment as immovable property.
This means you can direct your cash flow to other important aspects of your firm in the long run. Alternatively, you can allocate these extra funds for investments or even leisurely stuff like holidays or shopping.
4. Possibility of claiming benefits
If you get ownership of the car during the time of purchase, you can claim goods and services tax (GST) in your upcoming Business Activity Statement (BAS). That said, this tax benefit can only be claimed only if your business is registered for GST on a cash accounting basis.
Furthermore, you can also claim deductions for depreciation and interest charges in your BAS since the chattel is considered an asset for the firm. As a cherry on top, chattel mortgages don’t get charged in your monthly repayment either, so you get to keep more of your capital safe from large tax breaks.
5. Immediate access to the asset
Another great perk of a chattel mortgage is that you don’t have to wait until you have enough money to buy it. As long as the lender approves, your equipment will be within reach and operational.
Of course, this will depend on your ability to abide by the monthly repayments, but if you don’t default, you can essentially have early ownership of the asset. This makes it a great option for businesses that are currently unable to afford a big asset at present.
While there are certainly advantages to getting a chattel mortgage, there are some downsides as well. If everything is positive, there wouldn’t be such an extensive variety of loan products out in the first place.
Here are the five disadvantages of getting a chattel mortgage that you should be aware of.
1. Less regulated than traditional mortgages
Chattel mortgages aren’t regulated by the National Consumer Credit Protection Act (NCCPA). This lack of protection means that some credit providers that advertise chattel mortgages may be tempted to overlook or cross regulatory guidelines.
If a borrower isn’t careful, they could end up with a loan that carries unfavourable terms like high-interest rates or hidden fees. This is why it’s important to find an accredited lender and read up on the loan agreement before signing a contract.
2. The borrower can repossess your asset
Chattel mortgages offer limited protection for the borrower compared to other types of loans. If you default on your payments, the lender can repossess the asset you bought with the loan.
If that asset is a major component of your business’s operations, this can essentially spell the downturn of your business outright.
3. Not as many local borrowers
In comparison to traditional mortgage plans, chattel mortgages are not as widely sought after (mostly because they’re not popular). As a result, there aren’t many lenders who offer them.
This makes it a little harder to come by, which restricts your options overall if you’re limiting yourself to local financial institutions.
However, this problem can be dealt with if you find options online, as there are a good amount of online vendors who offer chattel mortgages without any hassle.
4. Higher monthly payments
Since the amount is typically smaller with a chattel mortgage, that means your monthly payments are going to be relatively higher.
If your business’s cash flow is tight as it is, a chattel mortgage may be a hard sell since a bigger chunk of your income will be allocated to the monthly payments.
5. Higher interest rates
Chattel mortgages tend to have higher interest rates than traditional mortgages, usually costing businesses about 1% to 2% more per month.
While this may seem negligible in the grand scheme of things, these higher interest rates can add up over the long haul, further eroding your company’s profits.
Choosing a chattel mortgage lender goes beyond comparing quotes. You’ll want to ensure that your relationship with them will be mutually beneficial. You’ll also want to have peace of mind knowing you’re partnering with an institution that’s reliable and trustworthy.
Here are some tips to consider when choosing a chattel mortgage lender.
1. Consider the long-term costs and benefits of the mortgage
While a salesperson may have convinced you of the benefits of a chattel mortgage, it’s important to take a step back and consider the long-term costs and benefits associated with this type of loan.
While chattel mortgages are indeed full of benefits, there may be times wherein a business is better off seeking other financing options. Furthermore, some businesses may not possess the current financial capacity to be able to take on a chattel mortgage.
As such, be sure to thoroughly assess your business’s financial standing before making a decision. This way, you won’t enter a year-long contract (or worse!) that you’d end up regretting.
2. Compare rates and terms from different lenders
Don’t settle for the first lender you come across. Compare rates and terms from different lenders to secure the best one for your business.
In addition to vetting the current monthly cost and repayment terms, make sure you understand the payment scheme throughout the period. Is the interest rate fixed or variable? Are the repayment terms amendable in the future?
Get all the figures cleared out as soon as possible. By comparing apples to apples, you’ll have an unbiased view of the loan options available to you.
3. Check the lender’s reputation and reviews
As mentioned previously, regulation is a little loose when it comes to dealing with chattel mortgages. You’d want to partner with a good-quality firm, and reading up on what people have to say about the company is a great way to do just that.
Lots of companies online have publicly listed reviews on Google and Yelp, and lending companies are no different. Be sure to be in the loop and check out what previous customers have been saying.
By doing this simple but effective duty, you can immediately vet lending companies and eliminate ones that may have more questionable motives.
4. Read the fine print before signing the agreement
Don’t sign a chattel mortgage agreement until you’ve fully understood the terms and conditions.
You don’t want to deal with surprise hidden fees and increasing interest rates further along your repayment timeline. Carefully reviewing the contract will provide you with an understanding of your legal obligations.
If you’re curious about other financing options, there are lots of institutions that offer different types of loan packages.
Here are some of the most notable alternatives to the chattel mortgage setup:
1. Consumer loans
Also known as personal loans, these are the classic type of loans for purchasing goods.
The terms may be slightly favourable compared to chattel mortgages, but eligibility is stricter and you’ll generally face a longer repayment period using this method.
2. Lease agreements
This option grants businesses the most flexibility with their capital since they don’t intend to own the goods outright.
Instead, firms pay a monthly fee to lease the equipment or vehicle over a specified period. After that, you simply return the merchandise to the lender.
3. Hire purchase
This solution is similar to a chattel mortgage, except that the borrower doesn’t legally own the items until the loan is completely paid off.
Moreover, a hire purchase scheme allows a balloon payment to be paid at the end of the term. It’s generally more flexible than chattel mortgages in that regard.
If your business needs a vehicle, piece of machinery, or some other large, movable asset, applying for a chattel mortgage is something you should consider.
The great thing about these loans is that it’s highly accessible, so much so that businesses with lower credit than average may still be eligible.
Furthermore, chattel mortgages are more non-committal than traditional loans, offering a lower repayment period.
All in all, utilising a chattel mortgage can allow your business to jumpstart its operations faster than waiting for purchasing equipment when you have enough capital.
It’s not always going to be the perfect way to raise money for your business, but for the right company, a chattel mortgage can save you time and get you turning wheels much quicker than your competitors.