Chattel Mortgage Vs Lease - What’s the difference?

Having extra cash to purchase commercial vehicles outright is a luxury most businesses can’t afford. That’s why many lenders and dealerships offer a range of financing options to facilitate equipment finance purchases – these can help ease cash flow and allow you to afford a better, more reliable and useful vehicle.

There are also a number of tax benefits involved with purchasing a vehicle for business purposes. You’ll normally be able to deduct things like loan payments, running costs and Fringe Benefits Tax (FBT) from your pre-tax income. You might also be able to get tax deductions for depreciation and claim GST on the initial purchase.

When you've decided on how much to spend on a car and are purchasing a new or used vehicle for your business each finance option available has its own unique characteristics that will impact your business. When searching around you’ll most likely encounter the terms chattel mortgage, finance lease, novated lease and operating lease as these are some of the most popular finance options. In this article, we’ll explore exactly what each of these options involves, as well as their pros and cons, so you can make a well-informed decision.

Choosing the best finance option for your business

When you’re choosing between a chattel mortgage or a lease, there are a number of factors that should influence your decision:

  • The type of business you’re operating
  • Your financial situation
  • The type of asset you’re looking to buy
  • If you require ownership of the asset
  • Tax benefits available

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

A chattel mortgage is a commercial loan product and works in the same way as a fixed-rate traditional mortgage. The lender will use your car as security against the loan, and you’ll effectively have ownership over the vehicle right away. By comparison, a lease is a long-term rental agreement, and you normally won’t ever have ownership of the vehicle. 

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    What is a Lease?

    In broad terms, a lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. Property, buildings and vehicles are common assets that are leased. There are three main types of vehicle leases: finance leases, novated leases and operating leases.

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    Finance Lease

    A finance lease is where you pay a lender to use the vehicle, much like a long-term rental agreement. The lessor takes the risk on the purchase and resale of the vehicle, and it frees up your business capital that may otherwise be tied up with ownership of the asset. Your business will then pay monthly instalments, or rental payments, for the duration of the lease period. At the end of the lease, you’ll have the option to either pay out the residual value of the vehicle or return the asset with no resale value risks. 


    • Budgeting is easier as you agree to a fixed price for the term of the lease.
    • A finance lease gives the business use of an asset of newer or higher specifications than they could otherwise buy outright.
    • You can continue to upgrade the vehicle to the latest model at the end of the lease period.
    • The cost of the asset is paid by monthly instalments over the long term rather than a large upfront investment, these payments are at an interest rate that will not increase even if bank interest rates rise.
    • This leasing option has tax benefits for business owners as they can claim the whole repayment as a tax deduction.
    • 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.


    • Vehicle maintenance costs throughout the lease period are your responsibility; registration, insurance, servicing etc.
    • There is some risk at the end of the lease if you or the finance provider choose to sell the asset 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

    A novated lease is a unique employee-benefit arrangement that involves you, your employee and a financier, and can last between one and five years.

    It’s a form of ‘salary packaging’ that helps finance new or used vehicles by repayment obligations made from an employee's pre-tax salary. This can effectively reduce your taxable income and also can allow you to bundle your vehicle’s expenses into one simple payment.


    • A novated lease can include everything from maintenance to fuel and insurance.
    • Business owners save significant time and money compared to administering their own fleet of vehicles or assets.
    • No residual/balloon payments at the end of the lease period.
    • Reduces payroll tax and WorkCover premiums.


    • 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.

    Operating Lease

    An operating lease is a rental agreement used to finance a vehicle for less than its useful life, with the vehicle able to be returned to the lessor at the end of the lease period without any further obligation. 

    Operating leases generally have a shorter term than the other popular types of leases, so you are able to upgrade to a new vehicle regularly. You may even be able to do this whilst the lease is still active. One of the main differences between an operating lease and a finance lease is that with an operating lease, the user will not be able to buy the vehicle at any point throughout the lease.


    • Operating leases provide greater flexibility to businesses as they can replace/update their vehicles more often.
    • No risk of the vehicle becoming obsolete, as there is no transfer of ownership.
    • Lease payments are tax-deductible.


    • The lessee never gains ownership over the vehicle and it must be returned at the end of the agreement. A new lease agreement will then need to be made for the same asset, or a replacement purchased.

    Chattel Mortgage

    When it comes to car finance, a chattel mortgage is a very popular option among business owners and operators. A chattel mortgage has a similar structure to a fixed-rate traditional mortgage whereby the finance provider uses the vehicle as the security for your car loan. Chattel refers to the car or equipment, and mortgage refers to the loan. 

    Unlike a lease, a chattel mortgage gives you ownership of the vehicle right away and you then pay off the loan from the income the asset generates in your business. If you’re unable to meet your monthly repayments, your finance provider may be able to repossess your vehicle. 

    You’ll be able to claim GST on the initial purchase price of the vehicle, as long as your business is registered for GST. The maximum amount of GST you can claim on your vehicle is 1/11th of the cost limit that is set by the ATO. For 2021-22, the maximum GST credit available to claim is $5,521.


    • Repayments can be structured over a range of terms – usually between 2 to 5 years.
    • Interest rates are generally lower than unsecured loans and can be fixed or variable.
    • Repayments can be fixed at the same amount each month or can be structured to fit your seasonal cash flow requirements.
    • A balloon payment or residual payment can be set at the end of the loan period to lower your monthly payments.
    • You may be able to claim an input tax credit up-front. 


    • You are responsible for all operating costs and maintenance of the vehicle.
    • The business only has full ownership of the asset when the term of the mortgage ends.

    What happens at the end of a chattel mortgage?

    After you’ve made your last loan repayment and any residual value (the final balance on the vehicle) has been repaid at the end of a chattel mortgage, you’ll have full legal ownership of the vehicle. 

    Is a chattel mortgage a novated lease?

    No. A chattel mortgage is a loan product wherein the vehicle you’re buying is used as security against the loan. A novated lease is a unique employee-benefit arrangement that finances a vehicle for employee use by repayment obligations made from an employee’s pre-tax salary. 

    So Chattel Mortgage vs Lease, which is right for my business?

    Both a chattel mortgage and a lease can help you acquire key assets needed to expand your company. But in terms of which is more ideal, it all depends on your unique business circumstances and it’s important to consider your cash flow, debt balances, current assets owned and performance metrics when weighing up options. 

    There’s a lot to digest with these car finance options and it can seem overwhelming when looking to source finance for business equipment, that’s why we’re here to help! Find out how much you can afford to pay for a car by using our simple car loan repayment calculator.

    If you’ve got any questions about chattel mortgages or leases, or if you’d like to chat about what option might be best for you, feel free to get in touch with our commercial vehicle finance specialists. Give us a call on 1300 755 494 or email us at and we can help find the best loan option for your business. If you’re ready to get started now you can apply online using our simple platform here.

    Declan Flaherty

    As the Digital Marketing Manager at Driva you can find Declan during the day transfixed by a flurry of spreadsheets, mar-tech, Slack emojis and graphs all pointing in the right direction and keeping up to date with the latest car finance trends.

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