Chattel mortgage vs hire purchase: close cousins, one real difference

Most finance comparisons pit two quite different products against each other. This one doesn’t. A chattel mortgage and a hire purchase agreement look alike on a quote, behave alike at tax time and usually cost a similar amount. If you’ve been offered one and wondered whether to hold out for the other, the short answer is that it rarely matters as much as the price, the term and the balloon. The longer answer is below, because in a few situations the difference in legal title does count.

How did two different products end up so similar?

A chattel mortgage is a loan. You buy the asset, you own it, while the lender holds a mortgage over the asset until it’s repaid. A hire purchase is technically a hiring arrangement: the financier buys the asset and hires it to you, with ownership passing when you make the final instalment.

For years, one rule separated them. Businesses accounting for GST on a cash basis could claim the whole GST credit upfront under a chattel mortgage, but only bit by bit as each hire purchase instalment was paid. Financiers responded by steering customers towards chattel mortgages. From 1 July 2012 that rule changed, and hire purchase agreements entered on or after that date allow an upfront GST credit regardless of accounting basis.

Two other areas of law pulled them together too:

• Income tax. Tax law treats a hire purchase as a sale financed by a loan, so your business is treated as the holder of the asset and claims depreciation and the interest component, just as it would under a chattel mortgage.
• Security law. The Personal Property Securities Act looks at substance over form. Section 12 lists a hire purchase agreement as a transaction that creates a security interest, so the financier registers on the PPSR in much the same way a chattel mortgagee does.

Side by side

	Chattel mortgage	Hire purchase
Legal owner during the term	Your business	The financier
When you become the owner	At settlement	When the last instalment clears
GST credit on the price	Upfront, on your next BAS	Upfront, for agreements since 1 July 2012
Depreciation and interest	Claimed by your business	Claimed by your business
Instant asset write-off	Available if eligible	Available if eligible
Balloon option	Yes	Yes
PPSR registration	The lender’s security interest	The financier’s interest, treated as security
Selling during the term	Clear the loan from the proceeds	Pay out the agreement before title can pass
If you default	Lender enforces its security	Financier terminates and repossesses as owner

The equipment finance calculator works the same way for both, since the repayment maths is identical once the price, term and balloon are set.

Where legal title still makes a difference

Selling or trading in mid-term. With either product you’ll need a payout figure, because the financier’s registration on the PPSR will show up in any buyer’s search. With hire purchase you also need the financier’s cooperation to transfer title. In practice dealers handle both every day, but a private sale is a little smoother when you already own the asset.

Modifying the asset. If you plan to fit out a van with racking, add attachments to an excavator or sign-write a fleet, owning it outright under a chattel mortgage avoids any question of altering someone else’s property. Many hire purchase agreements allow reasonable modifications, but read the clause first.

Default and repossession. As legal owner, a hire purchase financier recovers its own goods. A chattel mortgagee enforces a security interest. The end result is usually similar, but the contract terms and notices differ, so read the default section of whichever agreement you’re offered.

Balance sheet presentation. Your accountant records both as an asset with a matching liability in most cases, but a few businesses or their banks have a preference about holding legal title. If a lender’s covenants refer to owned assets, ask whether a hire purchase counts.

Got a quote for one and wondering about the other? Tell us about the asset; the form takes about a minute.

When a chattel mortgage wins

• You want title from day one for resale flexibility, modifications or simple peace of mind.
• The financier you prefer only writes chattel mortgages, which is common for vehicles and mainstream equipment.
• Your bank or other lenders look at owned assets when assessing the business.
• You might sell privately before the term ends. Owning the asset makes that conversation easier with a buyer.

Our page on the chattel mortgage covers the GST claim, car limit and balloon choices in detail.

When hire purchase wins

• A dealer or manufacturer program offers it on better terms. Some equipment suppliers still run hire purchase through their own finance arms, sometimes with seasonal repayment options or promotional terms.
• The financier will only take the risk if it keeps title, which can happen with specialised machinery, a newer business or a credit history that needs a little extra comfort for the lender.
• You want the structure to mirror how you think about it: hire now, own at the end, with automatic transfer and nothing further to sign.

The hire purchase page explains how title transfer works on the final payment.

A worked example

An illustrative earthmoving business wants a $165k excavator (including GST) and gets two quotes over five years, each with a 20% balloon.

• Chattel mortgage from an equipment financier. The business owns the excavator at settlement, claims $15k of GST on its next BAS and depreciates the machine.
• Hire purchase through the manufacturer’s finance arm. The business claims the same $15k GST credit upfront, depreciates the machine in the same way, and becomes legal owner after the final payment.

With tax and GST treatment the same, the decision comes down to three things: the total repayable on each quote, how early payout is calculated, and whether the owner expects to sell or modify the excavator before the term ends. If the manufacturer’s quote is cheaper and the owner plans to keep the machine for ten years, hire purchase is perfectly sound. If the business may upgrade in three years and sell privately, the chattel mortgage edges ahead.

A quick checklist

1. Compare total repayable, fees and balloon on each quote, not the product name.
2. Ask how early payout is worked out under each agreement.
3. Check whether the agreement restricts modifications or moving the asset interstate.
4. Confirm with your accountant that both give the same tax result for your structure.
5. If you’re also considering leasing, read leasing vs buying equipment or chattel mortgage vs finance lease.

Getting the machine working, whichever label is on the contract

The product name matters less than finding a financier that will approve your business for the asset you need on terms that suit your cash flow. That’s especially true for younger businesses, used equipment or anyone a bank has already turned away. The form is short (sixty seconds or thereabouts) and your credit rating is left alone when you submit it. We don’t pass what you tell us down a parade of lenders: someone who knows equipment finance works through your circumstances and then phones. Give us accurate figures on the asset, its price and your trading so the first suggestion is a good one.

Find finance for your equipment →