Chattel mortgages are a popular lending product, especially among business owners and operators.
Although the term “mortgage” typically applies to a home, in this instance, a mortgage is meant to refer to the structure of a fixed-rate home loan.
A chattel mortgage is used explicitly for equipment and modular homes and has similarities with an Equipment Loan.
If you’re interested in purchasing a movable piece of equipment or manufactured home, a chattel mortgage may be the best option for you. In this article, we’ll explain why.
Although the term can be confusing, an Australian chattel mortgage is similar to a secured car loan or mortgage, but the assets purchased are primarily for business use.
For example, if you’re a tradesperson and you need a utility vehicle for moving equipment related to your business across sites, you’ll qualify for a chattel mortgage.
Vehicles that you would use only for personal use, like driving to and from work, qualify for a car loan.
How Does a Chattel Mortgage Differ From a Mortgage?
A chattel mortgage can only be used for movable property, like trucks or forklifts, whereas a traditional mortgage is reserved for stationary homes.
Chattel mortgages can include module homes, but not mobile homes or trailers, even though you can move them with a vehicle.
Modular and Manufactured Homes
Modular homes that are built in factories and moved together in sections and entirely constructed on-site will qualify for a chattel mortgage.
You can also use a chattel mortgage for manufactured homes made in a factory and then plopped on the ground and connected on-site.
The difference between the two is that a modular home is built in parts, while a manufactured home is constructed after June 1st, 1976, and is fully assembled before it leaves the factory.
Heavy Machinery
Finally, a traditional mortgage cannot be used for heavy machinery. Heavy machinery is specially designed for executing construction tasks, most frequently ones involving large construction lasks or earthworks operations.
Chattel mortgages can be offered to implementation, structure, traction, control, information, and powertrain equipment systems.
Most construction companies rent bulldozers, cranes, or tractors, but scaling businesses may prefer to rent to own, so they don’t have to rely on a third party for most of their operations.
What Are the Benefits of a Chattel Mortgage?
A typical chattel mortgage will come with the following benefits:
- A repayment structure that ranges from 2-5 years.
- Lower interest rates than what’s provided in an unsecured loan.
- Loans that can use fixed or variable terms for added flexibility.
- Repayments can either be fixed at the same amount or varied based on your business structure. If you have a seasonal business, this loan can revolve around your needs.
- Owning the financed asset up-front, meaning it appears on your balance sheet.
- To lower your monthly payments, you can request to schedule monthly or yearly lump-sum payments, or you can add on a large balloon payment.
Chattel mortgages provide the flexibility that most startups need when they’re just getting started. Even long-term companies will see a return on their new business asset when they want to apply for a secured business loan, a personal line of credit, or other lending products.
What Are the Benefits of a Chattel Mortgage?
A typical chattel mortgage will come with the following detriments:
- Although interest rates are lower than with a personal loan, they are more expensive than a traditional mortgage, leading to sticker shock for those who own a home.
- The borrower could lose their equipment if they fail to make payments. That could be incredibly detrimental for a business that has a massive project coming up.
Since renting heavy equipment can lead to a waiting period, a business could lose a contract if they aren’t prepared.
If you know you’re about to default on your payments, try to have a backup plan in place for a rental or delay your operations until you can purchase or rent once again.
Chattel mortgages can also be used for homes, so your home may be repossessed if you default.
However, if you’re having issues making your payments, it’s better to contact your lender as soon as possible. Lenders can put you on a repayment schedule that works for you.
What is a Lump Sum Payment?
Some chattel mortgages will allow you to make scheduled or unscheduled lump sum payments on your loan principal.
Many businesses can cut 10-15 months off of their loan’s interest rates through the lump sum method, which leaves you with more money for more equipment.
However, typically this option isn’t available to people who finance their equipment as they don’t currently have a lot of cash flow. It’s still better to have this option once you do.
If your business does see an increase in profits, you can put it towards the loan’s principal, but if you are subjected to repayment fees, you may want to avoid making a lump sum payment.
Discuss whether you can put down lump sum payments without fees upon signing up.
What is a Balloon Payment?
A residual or balloon payment is an amount that is put on your loan to lessen your monthly payments. However, you still need to pay off that balloon payment at the end of the loan’s term.
Unfortunately, a higher balloon payment will incur more interest over the term of your loan, but you may want a high balloon payment if you require more cash flow.
We recommend that startups put a few hundred dollars into their balloon payment as their business is more sensitive to market changes.
Once a startup is established, it can be riskier with its investments.
What are the Tax Implications of a Chattel Mortgage?
When you’re approved for a chattel mortgage, you will have to take on a partial tax burden on your company.
As with most car loan products, you’ll have to pay the goods and service tax that’s included on the equipment, but you’re entitled to claim an input tax credit up-front.
You are also allowed to claim depreciation costs and interests on the equipment you financed.
Should I Negotiate My Chattel Mortgage?
You should negotiate the terms of all your lending products to ensure you get the best deal possible.
Always consider the length of time you’ll need the equipment you’re financing because that can also determine how much you’ll pay towards your chattel mortgage each month.
Conclusion
Finally, to save money on equipment, opt for used equipment instead of buying new or partially new. However, if you’re putting a chattel mortgage on used equipment, ask for its purchase papers or serial number, so you can estimate how much life is left in your purchase.
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