chattel mortgage vs lease

Answering the question of the best type of equipment finance depends entirely on the purpose of the asset, how it will be used, and what you want to happen at the end of the loan or lease.

To help you decide whether a chattel mortgage vs lease equipment finance is right for you and your business it’s important to understand the pros and cons of each.


There are three types of lease options: the operating lease, the finance lease and the novated lease.

Operating Lease

An operating lease is a set repayment schedule over an agreed period. The lessor retains ownership of the asset, and at the end of the lease period you have the following options:

  • Return the equipment to the lessor

  • Return the equipment and lease another asset

  • Purchase the equipment from the lessor (at a price negotiated with the finance company)

  • Lease the same asset at a newly negotiated rate

The repayments on an operating lease can be adjusted to include all maintenance costs such as parts and servicing, as well as a km allowance and fuel for vehicles. These leases are traditionally relatively short term to account for the limited lifespan of the asset.

Operating lease: Pros

  • All running costs such as registration, new parts, servicing, and insurances can be included in the repayments.
  • Currently, an operating lease can stay off the balance sheet and is neither an asset nor liability.
  • In general, when you have leased an asset through your business, the lease payments are tax deductible.
  • If you are registered for GST, the GST charged on the repayments can be claimed as an input credit on your BAS statement.
  • You can just hand back the asset at the end of the lease period, even if the if value of the asset is less than the residual amount.

Operating Lease: Cons

  • The asset must be returned at the end of the lease; you don’t have ownership. If you still need it you’ll need to sign on for a new operating lease with a new asset or negotiate a new lease or sale of the asset.
  • If you wish to buy the asset, it will be necessary to negotiate a price (there’s no set price in the lease agreement). As there is no fixed price, the purchase price it at the company’s discretion.
  • In 2019, the rules are set to change, and an operating lease will need to be listed on the balance sheet.

Finance Lease

With a finance lease, the lessor has ownership of the asset and subsequently leases it to you for the term of the lease. Upon application for the equipment finance, the lessor purchases the asset in question for the lessor to rent from them.

However, unlike an operating lease, in exchange for the monthly rental payments, you have all the rights and responsibilities of ownership (full use of the asset plus the maintenance costs), without actual ownership. At the end of the lease you can:

  • Return the Asset. You can return the asset to the lessor (the lessee guarantees the residual value and is liable for any shortfall).

  • Purchase the asset for the residual value. You can purchase the asset for the residual value stated in the agreement. Or refinance the residual on a new agreement for a further term.

Finance leases generally allow business owners to find and select the asset or equipment of their choice and negotiate the price with the seller. Then the lessor will purchase it on their behalf.

Finance Lease: Pros

  • You don’t have to worry about losing a reliable asset at the end of the lease period if it’s serving your business well.
  • This leasing option is beneficial to business owners as they can claim the whole repayment as a tax deduction.
  • You can continue to trade up your asset at the end of each lease, so you always have the latest model.
  • You have the option to refinance the residual value payment and continue leasing the same asset if you don’t wish to trade it in.

Finance Lease: Cons

  • The costs of maintaining the asset throughout the lease are your responsibility; registration, insurance, etc.
  • A finance lease must be listed as a liability on the balance sheet.
  • There is some risk at the end of the lease if you or the lessor choose to sell the asset on and the sale comes to less than the residual value you agreed to when signing on for the lease. You will have to make up the difference.

Novated Lease

This is a lease where you the business owner act as a conduit for your employee. It’s a three-way agreement between the business, the lessor, and the employee. By offering this leasing option to employees, they can salary sacrifice an asset purchase and save money on their tax return.

  • The business owner pays the lease payments and asset expenses on behalf of the employee, but the lease agreement is in the employee’s name, and the payments are deducted from their salary.
  • A novated lease can include everything from maintenance and parts to fuel and insurance.
  • The employee takes responsibility for selecting the asset and negotiating the price.

Novated Lease: Pros

  • The lease is between the lessor and the employee, so business owners are not responsible for the upkeep or administrative costs of the asset.
  • Business owners save significant time and money compared to administering their own fleet of vehicles or assets.
  • Business owners are not responsible for any residual/balloon payments at the end of the lease.
  • Business owners are not left with an asset they don’t need if the employee leaves.
  • Novated leases are not listed on the balance sheet.
  • Reduces payroll-tax and WorkCover premiums.

Novated Lease: Cons

  • You don’t own the asset, and it’s in the employee’s name, so you can’t give it to another employee for work use.

Chattel Mortgage

With a chattel mortgage, you are the owner from day one. In this case, the asset is the ‘chattel’ or security for the loan. You make agreed repayments until the end of the term of the loan, and the deal is done.

You can choose to have a residual or balloon payment at the end of the loan period to reduce the cost of your regular repayments. However, it’s ideal if this residual amount reflects the proposed value of the asset at the end of the loan period, so you’re not left having to pay out more than the asset is worth at the end of the term.

Chattel Mortgage: Pros

  • You are the owner, and you can retain ownership at the end of the term (assuming any balloon is paid) with no further payments to the lender.
  • When the asset is for business purposes, the interest on your repayments can be claimed as a tax deduction.
  • You can claim the GST on the purchase price as a tax deduction and depreciation.
  • The equipment is listed as an asset on your balance sheet from day one.

Chattel Mortgage: Cons

  • You are responsible for all running costs and maintenance.

So, Chattel Mortgage vs Lease?

This will depend on the needs of your business, and the type of asset or equipment you need to finance.

With an operating lease, you can switch up to the latest model at the end of the lease and deduct the payments at tax time. A finance lease gives you the stability of ownership at the end of the lease period, and a novated lease allows you to offer significant perks to your employees at a minimal cost to yourself.

A chattel mortgage, on the other hand, gives you ownership from the very start, has flexible options, and offers significant tax deductions.

So, whether a chattel mortgage v lease is the right choice for you will depend on your circumstances and what is best for your business. Speak to your finance broker about which equipment finance option is more suitable for you.