What Is The Difference Between A C.H.P. And A Chattel Mortgage?

A Commercial Hire Purchase (“C.H.P.”) and a Chattel Mortgage are similar in some ways, but very different in others.

 

Similarities

Both loan types are for business purposes. That means that the vehicle would need to be used for more than 50% business usage. As they are both business use loans, they are not governed under the current National Consumer Credit Protection Act.

 

Both these structures will allow flexible loan terms, usually up to 5 years (some lenders up to 7 years even with a balloon at the end). The financier will in most cases allow the option of a lump sum balloon payment at the end of the loan, depending on the vehicle type and age of that vehicle.

 

The financier will take security of the vehicle and will not release security until all outstanding monies have been paid.

 

The interest is available to be claimed as a tax deduction, and so is the depreciation on the vehicle.

 

Differences

The borrower of a C.H.P. does not actually own the vehicle until all financial obligations are met as per their C.H.P. agreement, whereas a Chattel Mortgage the borrower will own the vehicle from purchase date.

 

The terms charges (interest) and fees on a C.H.P. are subject to GST, which is in addition to the GST payable on the vehicle. Under a Chattel Mortgage agreement, the only item subject to GST is the vehicle itself and none of the Chattel Mortgage interest or fees are subject to GST, other than any fees payable to introducers that may be financed, known as Origination Fees.

 

Summary

Prior to changes through the Federal Budget in 2012, a C.H.P. and Chattel Mortgage were even more similar, as the terms charges and fees on a C.H.P. were not subject to GST prior to this budget.

 

The key differences prior to the budget were how the GST on the vehicle was claimed, as it was dependent on whether your business had its GST set up on an accrual or cash basis, and this was dependent on how you could claim your GST on a C.H.P. A Chattel Mortgage will always allow you to claim all the GST upfront regardless of your accounting methods based on your business usage and as long as you are registered for GST.

 

Both structures would have you showing the vehicle on your balance sheet; however you don’t actually own the vehicle under a C.H.P. agreement until all outstanding monies have paid. This is different for a Chattel Mortgage, as you own the vehicle straight away where the financier takes a mortgage over the vehicle.

 

A Chattel Mortgage appears to be the more favoured option by lenders, accountants and clients due to the confusion around the GST implications under a Commercial Hire Purchase Agreement. Most financiers have discontinued the option of C.H.P. for this very reason.