Chattel Mortgage

A chattel mortgage is a type of loan given for the movable personal property. The movable property also called a chattel serves as security for the loan, and the lender also holds an ownership interest in it.

A chattel mortgage can also be described as a secured car loan, given only for assets that their main purpose is for business operation, often referred to as an equipment loan. It is a very common loan option among business owners because of the ease and streamlined structure it gives to easily acquire assets. Examples of assets often financed with a chattel mortgage are farm equipment, vehicles, manufactured homes etc.

For a chattel mortgage, the lender provides the loan to purchase a vehicle or movable equipment, and you can immediately take ownership at the time of purchase. The lender takes a mortgage which is known as ‘ownership interest’ over the purchased asset as security for the loan obtained. The property becomes yours fully after the period of the agreement is completed and you have certified all requirements, in the event whereby the loan has no been fully repaid at the end of the contract, the lender takes over ownership of the property.

Chattel Mortgage and Traditional Mortgage

A chattel mortgage is different from a traditional mortgage in various ways, for a traditional mortgage, there is usually collateral given to secure a loan, under chattel mortgage a lender can take over the ownership of the property as this serves as the security for obtaining the loan.

The loan obtained under a chattel mortgage is secured by a lien or movable asset on the real stationary property. For instance, a chattel mortgage can be used for a movable house or manufactured house that can be fitted on-site, the mortgage covers for the movable house and not the property the house is erected. Even when the house is moved to a new location, the chattel mortgage is still valid.

A chattel mortgage is usually obtainable for mobile homes like trailers, whereby the owner buys the trailer but not the land, heavy business equipment for a business can also be obtained by finance through a chattel mortgage.

In general, the chattel mortgage is more expensive than the traditional or conventional mortgage loans, they carry higher interest rates than a traditional mortgage with shorter terms.

Types of Chattel Mortgage

Equipment loans

Chattel mortgage is majorly designed for business owners to be able to access more equipment. Heavy machinery which typically has a longer lifespan can be financed over a long time using a chattel mortgage plan with the seller maintaining a position of security interest on the equipment. The equipment can be sold by the seller to recover the loan balance if there is a default on repayment of the loan.

Compared to Hire purchase or Finance lease, this type of loan gives you ownership right immediately, and for businesses, the loan can be paid

Mobile homes

A mobile home can be in the form of a trailer or a house manufactured in a factory but the fitting is done on a piece of land, all these types of examples are regarded as mobile homes.

The chattel mortgage covers the mobile house, the mobile houses are situated on leased lands that are not part of the mortgage plan. The chattel mortgage plan covers the movable property even if it is moved to a different location.

Benefits of a Chattel Mortgage

Ease of repayment: Under the chattel mortgage plan, there is the ease of repayment. Repayment plans can be negotiated over a long range of terms, the term can be as high as 2 to 5 years. This allows you to spread out the payment plan monthly for the period of the contract.
Structure of repayment: Depending on whichever one is convenient for you, a chattel mortgage allows you to fix repayment at the same amount every month, or structure the amount to be paid to fit your seasonal cash flow. This permits the quick repayment of loans.
Immediate ownership: Compared to other traditional mortgage plans, the chattel mortgage gives you immediate ownership of the acquired equipment or property at the beginning of the contract. Immediate ownership allows the asset to be labelled as an asset on the organization’s balance sheet and the finance as a liability.

The disadvantage of a Chattel Mortgage

Interest Rates

The interest rate on a chattel mortgage is typically higher than the rate you would receive on a traditional mortgage. The high-interest rate is associated with the shorter payment term, the shorter the length of repayment, the higher the interest rate.

Loss of property

You can lose the purchased property to the lender if you default at payment since the lender still holds security interest over the purchased property. If you run into a financial problem during the contract and fail to make payment as scheduled, you stand the risk of losing the property.

Balloon payment

Balloon payment, also known as the residual amount is an amount of money that is not paid off the loan till the end of the loan agreement. The reason why people opt for balloon payment is to keep the monthly repayment amount considerably low, the higher the agreed balloon payment, the lower the monthly repayments.

Although having a high balloon or delayed payment increases the amount of interest that will be paid during the loan period, this is because there is still a large outstanding principal loan.

A balloon payment is encouraged for individuals or businesses who prefer to keep monthly repayments lower for the sake of cash flow.

Tax consideration

Under a chattel mortgage plan, you are allowed to claim an input tax credit ahead, this is because the goods and services tax (GST) inclusive purchase price of the purchased property is also financed with the mortgage plan.

Depending on how much the purchased property is used for business use, interest, as well as depreciation costs, can be claimed.