Chattel Mortgage vs Finance Lease vs Hire Purchase: Which Suits Your Business?

Peter Nikolaou
Excavator on a worksite financed with equipment finance

When you finance a vehicle, truck, machine or fit-out, the type of finance matters as much as the rate. It decides who owns the asset, how GST is handled, what you can claim as a tax deduction and what happens at the end of the term. These are the four structures we arrange most often.

1. Chattel mortgage

The most common choice for businesses. Your business buys and owns the asset from the start, and the lender takes a mortgage over it as security until the loan is repaid.

  • Ownership: yours from day one
  • GST: if you’re registered for GST, you can generally claim the GST in the purchase price on your next BAS
  • Tax: interest and depreciation are generally deductible for the business-use portion
  • Flexibility: optional balloon to lower repayments

2. Finance lease

The lender buys and owns the asset and leases it to your business for a fixed term. At the end you can usually pay the residual to take ownership, refinance the residual, or upgrade.

  • Ownership: the lender’s, unless you pay out the residual
  • GST: charged on each lease payment rather than upfront
  • Tax: lease payments are generally deductible for the business-use portion
  • Suits: businesses that want to keep cash free and spread GST over the term
Earthmoving machinery working on a site, a common equipment finance purchase

3. Hire purchase

The lender owns the asset while you pay it off in instalments, and ownership passes to you with the final payment. For many businesses it now works much like a chattel mortgage, which is why it’s used less often today.

4. Operating lease or rental

You rent the asset for a set period and hand it back at the end, with no residual to pay. Rental suits equipment that dates quickly, such as IT, or assets you want to replace on a cycle. Payments are generally deductible and the asset doesn’t sit on your balance sheet as a liability in the same way.

Which one should you choose?

  • Want to own the asset and claim GST upfront? A chattel mortgage is usually the fit.
  • Want lower upfront GST outlay and an easy upgrade path? Look at a finance lease.
  • Want to use the asset without owning it? Consider rental.
Tip: ask your accountant whether the current small business instant asset write-off rules apply to your purchase. The thresholds change, and they can affect which structure gives you the best tax result.

How a broker helps

Asset finance lenders differ on what they’ll fund, the age of the asset, balloon limits and how much paperwork they need. Many will approve on low documentation for established businesses. We compare lenders across our panel and set the structure up to suit your cash flow and tax position. See our vehicle and equipment finance page, or read about truck and fleet finance and machinery finance.

Frequently asked questions

What is the difference between a chattel mortgage and a finance lease?

With a chattel mortgage your business owns the asset from day one and the lender holds a mortgage over it. With a finance lease the lender owns the asset and your business pays to use it, with the option to buy it for the residual at the end.

Can I claim GST on a chattel mortgage?

If your business is registered for GST, you can generally claim the GST included in the purchase price as an input tax credit on your next BAS. Check the details with your accountant.

What is a balloon payment?

A balloon (or residual) is a lump sum left owing at the end of the term. It lowers your regular repayments but has to be paid out, refinanced or traded at the end.

Talk to Peak Capital

Book a free 15-minute call with a Sydney commercial finance broker. We’ll tell you what you can borrow and which lenders fit your situation.

Get a free quote  Call 0401 132 581

This article is general information only and doesn’t take into account your objectives, financial situation or needs. Speak to us or your accountant before making a decision.