Chattel mortgage vs hire purchase vs lease: what’s the difference?

When you buy a vehicle or piece of equipment through your business, the lender will usually offer more than one way to structure the finance. They can look similar on paper: a monthly repayment, a term and maybe a balloon. The real differences are about who owns the asset, how GST is handled and what you can claim.

Chattel mortgage

With a chattel mortgage, your business owns the asset from day one. The lender lends you the money and takes security over the asset, much like a mortgage over a house. When the loan is paid off, the security is removed.

Chattel mortgages are popular with GST-registered businesses because of how GST on the purchase price is treated, and because the business may be able to claim depreciation and interest. Your accountant can confirm what applies to you.

Commercial hire purchase

With hire purchase, the lender buys the asset and hires it to you. You make regular payments, and ownership passes to you once the final payment is made. Until then, the lender owns it.

Hire purchase has become less common since chattel mortgages became the default for many businesses, but some lenders still offer it and it can suit certain situations.

Finance lease

A finance lease means the lender owns the asset and you pay to use it for an agreed term. At the end, you can usually pay a residual to buy it, refinance the residual, or hand it back and upgrade.

Leasing can suit businesses that want to refresh assets regularly, such as IT equipment or fleet vehicles, or that prefer lease payments to be treated as an operating expense.

Which one is right?

There is no universal answer. It depends on your GST registration, how you do your books, how long you plan to keep the asset and your cash flow. A good broker will explain the options side by side, and a good accountant will tell you which one fits your tax position.

• Want to own it from day one? A chattel mortgage is usually the simplest.
• Plan to upgrade every few years? A lease may suit.
• Not sure? Ask your broker to model repayments for each, then run it past your accountant.

This article is general information only and does not take into account your objectives, financial situation or needs. Speak to your broker, and your accountant where tax is involved, before making a decision.