Chattel Mortgage vs Novated Lease: Which Is Right for Your Work Vehicle?
If you're financing a vehicle you use for work, you've probably heard the terms "chattel mortgage" and "novated lease" thrown around — and wondered which one actually makes sense for your situation.
Here's the truth: there's no single right answer. The best finance structure depends on your employment status, how you use the vehicle, your tax position, and what matters most to you — ownership, flexibility, or tax savings.
As an commercial finance broker in Brisbane who helps clients navigate these decisions daily, I've seen firsthand how choosing the wrong structure can cost thousands. Let me walk you through both options clearly, so you can make an informed choice.
What Is a Chattel Mortgage?
A chattel mortgage is a type of secured business loan where the vehicle (the "chattel") serves as security for the loan (the "mortgage"). You borrow a lump sum to purchase the vehicle, own it from day one, and repay the loan in fixed instalments over a set term — typically 2 to 7 years.
Despite the name, it has nothing to do with property. Think of it as a business car loan secured against the vehicle itself.
Who can get a chattel mortgage?
Chattel mortgages are available to:
- Sole traders operating with an ABN
- Partnerships and companies (Pty Ltd, trusts)
- Self-employed individuals who use the vehicle for business
The key requirement: the vehicle must be used for business purposes at least 51% of the time. If you're a PAYG employee who doesn't operate a business, a chattel mortgage generally isn't available to you — that's where a novated lease might come in.
How does a chattel mortgage work in practice?
- You apply for finance through a broker or lender
- The lender funds the purchase — you own the vehicle from settlement
- You make regular repayments (usually monthly) at a fixed interest rate
- The lender registers their security interest on the PPSR until the loan is paid off
- Once fully repaid, the security is removed and you own the vehicle outright with no encumbrances
You can also structure a balloon payment (residual value) at the end of the term, which reduces your monthly repayments during the loan but means a larger final payment.
Chattel mortgage tax benefits
This is where chattel mortgages shine for business owners:
- GST credit on purchase: If you're GST-registered, you can claim back the GST on the vehicle purchase price (up to the car limit for passenger vehicles — $69,674 for the 2025–26 financial year)
- Interest deductions: Loan interest is tax-deductible as a business expense
- Depreciation: You can claim depreciation on the vehicle's value over its effective life
- Running costs: Fuel, insurance, registration, servicing, and tyres are deductible based on business use percentage
For sole traders and businesses that use vehicles heavily for work, these deductions can add up to significant tax savings over the life of the loan.
What Is a Novated Lease?
A novated lease is a three-way agreement between you (the employee), your employer, and a finance company. Your employer agrees to make lease payments directly from your pre-tax salary — a process called salary packaging or salary sacrifice.
The "novation" refers to the transfer of your lease obligations from you to your employer. If you leave the job, the lease responsibility typically transfers back to you.
Who can get a novated lease?
Novated leases are specifically for:
- PAYG employees (full-time, part-time, or fixed-term contract)
- Your employer must agree to offer salary packaging — not all do, but most medium-to-large employers and all government departments offer this
If you're self-employed or a sole trader, a novated lease isn't available to you. You'd be looking at a chattel mortgage or other business finance options instead.
How does a novated lease work in practice?
- You choose the vehicle you want to lease
- A finance company provides the lease, with your employer named as part of the agreement
- Your employer deducts lease payments from your pre-tax salary each pay cycle
- Running costs (fuel, insurance, servicing, tyres, registration) can also be bundled into the salary packaging arrangement
- At lease end, you can pay the residual value to own the vehicle, re-lease it, or hand it back
Novated lease tax benefits
The tax advantage of a novated lease comes from salary packaging:
- Pre-tax payments: Because lease repayments come from your gross salary, your taxable income is reduced — meaning you pay less income tax
- GST savings: On eligible vehicles, you may save on GST through the arrangement
- FBT exemption for EVs: Electric and plug-in hybrid vehicles leased under a novated lease arrangement are currently exempt from Fringe Benefits Tax (FBT) up to the luxury car tax threshold ($89,332 for 2025–26). This makes novated leases particularly attractive for EV buyers.
- Bundled running costs: Fuel, insurance, servicing, and registration can all be packaged, giving you one simple salary deduction
The actual savings depend on your income level, marginal tax rate, and the vehicle's purchase price. Higher income earners typically benefit more from salary packaging.
Side-by-Side Comparison
| Feature | Chattel Mortgage | Novated Lease |
|---|---|---|
| Who it's for | Business owners, sole traders, companies | PAYG employees |
| Ownership | You own the vehicle from day one | Finance company owns it during the lease |
| Tax treatment | Deduct interest, depreciation, running costs | Salary packaging reduces taxable income |
| GST benefit | Claim GST credit on purchase (if registered) | GST savings built into the arrangement |
| Balloon / residual | Optional — reduces monthly payments | Required — set by ATO guidelines |
| Employer involvement | None | Required — they manage salary deductions |
| FBT consideration | Not applicable | Applies (except exempt EVs) |
| Flexibility | Full control — sell, modify, or keep as you wish | Restrictions during lease term |
| Business use requirement | Must be 51%+ business use | Can be any mix of personal and business |
Which One Is Right for You?
This is the question that matters — and where having an experienced finance broker makes a real difference.
A chattel mortgage might be your best fit if:
- ✅ You're a business owner, sole trader, or operate through a company
- ✅ The vehicle will be used predominantly (51%+) for business
- ✅ You're GST-registered and want to claim the GST credit upfront
- ✅ You want full ownership and control from day one
- ✅ You prefer to claim depreciation and interest as business deductions
A novated lease might be your best fit if:
- ✅ You're a PAYG employee
- ✅ Your employer offers salary packaging
- ✅ You're in a higher tax bracket and benefit from pre-tax payments
- ✅ You want running costs bundled into one easy deduction
- ✅ You're considering an electric or plug-in hybrid vehicle (FBT exempt)
What about a hire purchase?
A hire purchase is another common option, particularly for business vehicles. Unlike a chattel mortgage, you don't technically own the vehicle until the final payment is made — the finance company retains ownership during the term. However, you can still claim GST on payments and deduct interest and depreciation.
In practice, chattel mortgages have become more popular than hire purchase agreements in Australia because the tax treatment is slightly simpler and ownership transfers immediately. Your broker can explain the nuances based on your specific situation.
Real-World Scenarios
Scenario 1: Sarah, the self-employed tradie
Sarah is a self-employed electrician in Brisbane. She needs a new ute for work — $65,000 driveaway. She's GST-registered and the vehicle will be 90% business use.
Best fit: Chattel mortgage. Sarah gets the GST credit back upfront (saving ~$5,909), deducts the interest payments, and claims depreciation over the vehicle's effective life. She could also explore strategies to access her tax savings in every pay cycle rather than waiting until tax time — putting hundreds of extra dollars back into her pocket each fortnight.
Scenario 2: James, the corporate employee
James works for a large engineering firm in Brisbane and earns $130,000/year. He wants a new SUV for a mix of personal and work use, and his employer offers salary packaging.
Best fit: Novated lease. On James's marginal tax rate (37% + Medicare levy), packaging the lease payments and running costs from pre-tax salary could save him $5,000–$8,000 per year in tax. If he goes for an eligible EV, the FBT exemption makes the savings even more substantial.
Scenario 3: Mike, the small business owner with employees
Mike runs a small construction company and wants to buy a vehicle that his site manager will drive. The vehicle will be 100% business use.
Best fit: Chattel mortgage under the company. The company claims all deductions, Mike gets full control of the asset, and there's no FBT to worry about because the vehicle is used entirely for business and isn't available for private use.
Common Mistakes to Avoid
- Choosing based on monthly payments alone. The lowest monthly payment doesn't always mean the best overall outcome. A balloon payment reduces monthly costs but means a larger lump sum at the end of the term.
- Not considering your business use percentage. If your vehicle is under 51% business use, a chattel mortgage likely isn't available — and claiming deductions you're not entitled to creates ATO risk.
- Ignoring the residual value. Novated leases require an ATO-mandated residual value. Make sure you understand what you'll owe at the end of the lease term.
- Going direct to one lender. Different lenders have different appetites and pricing for chattel mortgages and novated leases. A broker who accesses a broad panel of lenders can find the right fit for your situation — not just the first option available.
- Not getting advice before signing at the dealership. Dealer finance is convenient, but it's rarely the best structure for your needs. Getting independent advice before you commit can save you thousands.
The Bottom Line
Chattel mortgages and novated leases are both excellent finance tools — but they're designed for different people in different situations. The right choice depends on your employment status, tax position, vehicle use, and financial goals.
The worst thing you can do is guess. A 5-minute conversation with a finance professional who understands both options can save you thousands over the life of your vehicle.
Need help choosing the right finance structure for your work vehicle? At Flagship Financial, we work with 30+ lenders to find the finance solution that fits your specific situation — whether that's a chattel mortgage, novated lease, or something else entirely. Get in touch for a no-obligation chat →
Frequently Asked Questions
Can I get a chattel mortgage as a PAYG employee?
Generally, no. Chattel mortgages require an ABN and are designed for business use. As a PAYG employee, a novated lease or standard car loan are your primary options. However, if you have a side business with an ABN and use the vehicle for that business, speak to a broker about your specific situation.
Is a novated lease worth it on a low salary?
The tax savings from a novated lease are proportional to your marginal tax rate. If you earn under $45,000, the savings may be modest. If you earn above $120,000, the savings can be significant. A good broker will model the actual numbers for your income level before you commit.
What happens to a novated lease if I change jobs?
The lease obligation transfers back to you. You can then negotiate a new novation with your next employer, refinance the vehicle under a different structure, or continue making payments yourself. It's important to plan for this possibility, especially if you change jobs frequently.
Can I claim a chattel mortgage on a car I also use personally?
Yes, but only the business-use portion is deductible. If you use the vehicle 70% for business and 30% personal, you can claim 70% of the interest, depreciation, and running costs. You need to keep a logbook for at least 12 consecutive weeks to substantiate your business use percentage.
Which option is better for an electric vehicle?
For PAYG employees, novated leases currently offer a significant advantage for EVs thanks to the FBT exemption on eligible electric and plug-in hybrid vehicles. For business owners, a chattel mortgage still works well — you get the standard business deductions plus potential instant asset write-off benefits.
Disclaimer: This article provides general information only and does not constitute financial, tax, or legal advice. Everyone's situation is different. We recommend speaking with a qualified finance professional and your accountant before making any financial decisions. Flagship Financial is an Authorised Credit Representative (ACR 517257) under COG Aggregation Pty Ltd (ACL 389527).
