What Is a Chattel Mortgage?

You’re familiar with a property mortgage, but what about a chattel mortgage? Like property mortgages, chattel mortgages are loans intended to allow you to purchase a high-value asset. However, there are some differences between chattel loans and regular mortgages to be aware of. We’ll take a closer look at the chattel definition below, along with how these types of loans work.

What are chattel loans?

A chattel mortgage or loan is a finance agreement allowing the borrower to take control of certain assets, such as boats and machinery. While the loan is being repaid, the borrower gains full use of the asset. At the same time, the asset serves as security for the loan which means it can be repossessed if the borrower defaults. Once the chattel mortgage has been fully paid, these restrictions end. 

In comparison to regular mortgages, chattel mortgages come with shorter terms which means they’re repaid within 10-15 years in most cases. With a residential mortgage, the lender can retain a lien on the property which may or may not be the case with a chattel property mortgage. The lender might hold onto legal ownership until the loan has been repaid, or the asset can be used as collateral while the borrower makes repayments.

Chattel definition and examples

Before diving into the inner workings of chattel loans, we’ll first look at the chattel definition. Chattel refers to any tangible personal property that the owner can move between locations. This could include things like:

• Vehicles and mobile homes

• Boats

• Industrial plants, manufacturing equipment, and machinery

• Farm animals

• Precious stones

• Artwork

• Luxury items

However, it wouldn’t include something like land or real estate which would be covered by a traditional mortgage instead. Traditional mortgages are separate from chattel mortgages for several reasons. One of the key differences is that chattel depreciates in value more quickly than fixed property.

How does a chattel mortgage work?

Chattel mortgages are issued by banks and other lending institutions as a security interest taken over movable assets, or chattel property. When you sign your mortgage agreement, the lender usually takes over the legal title of the chattel with the condition that this will be transferred back to the borrower once the debt has been repaid.

Terms and conditions will vary depending on your loan agreement, but you can expect to pay an admin fee for your chattel mortgage. There is often an early repayment penalty charge if you pay the loan in full ahead of schedule.

Benefits of chattel loans

There are several advantages to taking out a chattel mortgage. One of the primary benefits is its flexibility, with a choice of funding structures and term lengths. Like a traditional mortgage, you can usually request a payment break if your business is experiencing a diminished cash flow. Borrowers can also pay off the loan either in installments or a lump sum, depending on the terms.

If your assets are being used for business, favorable rates apply, and you might also be eligible for tax deductions to help cover the costs of repayment. Small businesses can also access expensive equipment that they otherwise wouldn’t be able to afford outright.

The bottom line

If your business needs to finance equipment, machinery, or automobiles, a chattel mortgage could be an attractive proposition. However, be sure to compare terms and conditions carefully. Chattel loans usually come with higher interest rates than a traditional mortgage, although you’ll be able to pay it off sooner. Factor in these interest payments over time to determine whether the loan is right for you. You’ll also need to think about whether you’ll need to use the asset in question over the full term of the loan. If you only need it for short-term use, a rental agreement might be better suited.

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