The main difference between a chattel mortgage and a hire purchase agreement is the timing with which the ownership of the asset transfers to the borrower.
Both structures have merit depending on what your objectives are for your business, as they will lead to different outcomes from a tax and cash flow point of view.
In this article, we will discuss how these outcomes differ.
This will give you a starting point for knowing what to discuss with a tax professional to ensure the optimal outcome for your business.
What Is a Chattel Mortgage?
A chattel mortgage is used to finance the acquisition of commercial assets that are then held as security over the loan until it is repaid.
At the end of the loan term, the encumbrance is removed, giving the business clear title of the asset.
Repayments are made on the loan in the same way as a regular car loan or mortgage until the balance is repaid in full.
What Is a Hire Purchase Agreement?
A hire purchase agreement provides full use of the commercial asset, but the ownership does not transfer to the buyer until the end of the payment term.
The financier retains ownership until then.
You’ll pay regular fixed instalments over the term of the contract in the same way as the chattel mortgage.
Hire Purchase vs Chattel Mortgages
The table below summarises the difference between a chattel mortgage and a hire purchase agreement:
Ownership: Immediate vs Deferred
The most influential difference between the two finance structures is the ownership of the asset that is being financed.
Under a chattel mortgage, the asset belongs to your business from day one.
This ownership provides the ability to claim depreciation, write off interest, and assert full control over how the asset is used or modified.
With a hire purchase, you’re effectively leasing the asset until the end of the agreement.
You are free to use the asset as if it is yours, but legal ownership only changes hands after that final payment clears.
This may suit businesses that want to delay asset ownership for strategic tax or liability reasons.
GST Implications for Each Option
If your business is registered for GST and uses the cash accounting method, you may be able to claim the full GST component of the asset’s purchase price upfront in your next BAS.
This can significantly improve cash flow and reduce the real cost of acquisition.
Under a hire purchase, GST is typically applied to each instalment, meaning the input tax credit is claimed progressively.
However, structured correctly, you may still be able to claim the full GST upfront in some cases.
As always, check with a tax professional for advice relevant to your situation.
Tax Benefits and Depreciation
Chattel mortgages allow you to claim interest and depreciation immediately. This can result in significant year-end deductions.
Hire purchase arrangements may limit your ability to claim full deductions upfront, and the tax treatment can be more complex.
Cash Flow Considerations
Hire purchase arrangements tend to offer smoother cash flow because they can include lower repayments and delay ownership.
However, chattel mortgages can actually improve cash flow long-term due to upfront GST refunds and depreciation benefits.
Utilising a balloon or residual payment in the structure of either product can also improve cash flow. You will just need to plan for that large final instalment.
Loan Terms and Flexibility
Chattel mortgages typically offer more customisation, including variable terms and balloon options.
Hire purchase terms are generally more structured, though many lenders now provide flexible residual setups to match business cash flows.
Both structures allow early payouts, but the treatment of interest and fees can vary.
Some chattel mortgages include early termination fees, while hire purchase agreements may require payout of the remaining interest.
Insurance and Maintenance Obligations
Under a chattel mortgage, unless there are conditions specifically mentioned in the loan agreement, and requirements for insurance and maintenance are purely at the discretion of the borrower.
The consequences of damage or neglect are yours alone, so there is less oversight from the lender.
A hire purchase agreement may come with a list of obligations you are expected to uphold throughout the term of the agreement.
These may include:
- Insurance covering any potential damage to the goods.
- A schedule of maintenance requirements.
In addition to this, you may also have to allow regular inspection of the asset from the lender to ensure that these obligations are being met.
This can be burdensome when compared to a chattel mortgage, where no oversight would be expected.
Consequences of Non-Payment
Under both structures, the lender will be able to take possession of the goods if you default on your payments.
The legal mechanisms in which this can take place vary, but the end result is the same.
Under a hire purchase agreement, the lender already owns the goods. Under a chattel mortgage, the lender is relying on the security registration.
Conclusion
An extra consideration is how temporary government incentives like the instant asset write-off will affect the benefits of a chattel mortgage compared to a hire purchase agreement.
These change regularly so it is best to seek professional advice on the current rules.
To summarise the difference between these commercial loan products, a chattel mortgage offers greater upfront tax benefits and immediate ownership.
Which is ideal for businesses with stronger cash flow or those seeking accelerated deductions.
Hire purchase suits businesses preferring to delay ownership with fixed, manageable repayments.
The best choice for your business will depend on your individual circumstances. If you would like to discuss with our team of expert brokers, then get in touch below.
