Short answer
These two are often compared, but they are really answers to different questions.
A chattel mortgage is a business purchase. Your business buys the vehicle, owns it from day one, and borrows against it.
A novated lease is an employment arrangement. You, your employer and a lease provider enter a three-way agreement, and the vehicle costs come out of your salary — part of it before tax.
So the first question is not which is cheaper. It is who is buying the car — a business with an ABN, or an employee with a salary and a participating employer.
The comparison at a glance
| Chattel mortgage | Novated lease | |
|---|---|---|
| Who is the borrower | The business (ABN) | Three-way: employee, employer, lease provider |
| Who owns the vehicle | You do, from the time of purchase — the lender takes security over it | The lease provider owns it during the term |
| How it is paid | Business makes loan repayments | Deducted from the employee salary, partly pre-tax |
| Requires an employer? | No | Yes — your employer must offer and agree to it |
| Requires an ABN? | Yes, and the vehicle must be predominantly for business use | No |
| GST on the purchase | Business may be able to claim a GST credit on the acquisition, subject to the car limit | Handled differently — GST treatment sits within the lease arrangement |
| FBT | Not applicable to the finance itself | Applies — the employer is liable for FBT on the car fringe benefit |
| End of term | You already own it; a balloon or residual may be payable | Pay the residual to buy it, re-lease, or hand it back |
| Typically suits | Sole traders, companies and trusts buying a work vehicle | Salaried employees whose employer offers salary packaging |
How a chattel mortgage works
Under a chattel mortgage, your business takes title to the vehicle from the time of purchase and finances the purchase price by way of a loan. The lender holds security over the vehicle — the chattel — and can recover it if you default. (Source: ATO — Hire purchase agreements and chattel mortgage.)
The tax position is what draws most businesses to it.
GST. Because you are acquiring the vehicle outright, a GST-registered business making a creditable acquisition may be entitled to an input tax credit on the purchase. Importantly, where the price exceeds the car limit, the ATO caps the GST credit at one-eleventh of that limit — so the credit on an expensive vehicle is not unlimited. (Source: ATO — Purchasing a motor vehicle.)
Interest. Loan interest is input-taxed, so there is no GST credit on the interest — though interest on a business loan may be deductible as a business expense.
Depreciation. The vehicle is a business asset, so depreciation is claimed in the normal way. The ATO notes that the cost you depreciate is reduced by any GST credit you were entitled to.
For the product itself in more depth, see chattel mortgage, and for the comparison against a standard consumer car loan, chattel mortgage vs car loan.
How a novated lease works
A novated lease is a three-way agreement between you, your employer and a lease provider. Your employer takes on the obligation for the lease payments, and a corresponding amount is deducted from your salary — which is why it is a salary-packaging arrangement rather than a loan in your name.
Because your employer is providing you with a vehicle for private use, fringe benefits tax applies, and the employer is liable for it. Since 1 April 2014 a flat statutory rate of 20% has applied to car fringe benefits calculated under the statutory formula method. Employers commonly ask employees to make after-tax contributions — the employee contribution method — which can reduce the taxable value of the benefit. (Sources: ATO — Car leasing and FBT and ATO — Salary sacrificing for employees.)
We have covered the FBT side in detail in novated lease and FBT, and the mechanics of the arrangement in how does a novated lease work.
How Alpha390 handles novated leases: novated leasing is fulfilled by a specialist partner. Alpha390 can capture your enquiry and refer you to that partner — we do not administer the lease ourselves. Vehicle finance in your own name, including chattel mortgages, is arranged directly by us.
So which one applies to you?
You are a sole trader, company or trust buying a work vehicle
A novated lease is not available to you in that capacity — it requires an employer relationship and salary packaging. A chattel mortgage is the usual starting point, with commercial hire purchase as the main alternative if you would prefer title to pass at the end of the term rather than the beginning. See also business car finance.
You are a salaried employee and your employer offers salary packaging
A novated lease is genuinely available to you and a chattel mortgage generally is not, because you do not have an ABN and business use to support it. The real comparison for you is novated lease vs car loan.
You are a business owner who also draws a salary from your own company
This is the only situation where both are genuinely on the table, and it is the one worth getting advice on. The arithmetic depends on your company structure, your salary, the proportion of business versus private use, and your marginal tax rate — which is well beyond what any web page can work out for you. Talk to your accountant before you commit either way.
One important note on electric vehicles: the FBT exemption for eligible low- and zero-emissions vehicles applies to novated leases and can change the comparison materially for EV buyers. Conditions and eligibility apply and have changed over time — see electric car novated leases and confirm current eligibility with the ATO or your tax adviser.
What happens at the end
Chattel mortgage. You already own the vehicle. If the loan was structured with a balloon or residual, that amount falls due at the end of the term — you either pay it, refinance it, or sell the vehicle to cover it. See balloon payment car loans explained.
Novated lease. A residual value is set at the start. At the end you can pay it out and take ownership, enter a new lease, or return the vehicle. If you leave your employer mid-term, the lease obligation generally reverts to you — worth understanding before you sign.
Not sure which structure fits?
Tell us how you are set up — business or salaried — and we will point you to the right option. Chattel mortgages and vehicle finance we arrange directly; novated leasing we refer to our specialist partner.
Chattel mortgage vs novated lease FAQs
Can I choose between a chattel mortgage and a novated lease?
Usually not — most people are only eligible for one. A chattel mortgage requires an ABN and predominant business use. A novated lease requires an employer who offers salary packaging. Only business owners who also draw a salary from their own company typically have both available.
Which one is cheaper?
There is no universal answer, because they are taxed in different hands. A chattel mortgage benefit depends on your business GST position and deductions; a novated lease depends on your marginal tax rate and how FBT is handled. The comparison has to be run on your actual numbers by your accountant.
Who owns the car?
Under a chattel mortgage, your business owns it from the time of purchase, with the lender holding security. Under a novated lease, the lease provider owns it for the term, and you can buy it at the end by paying the residual.
Does a chattel mortgage attract FBT?
The finance arrangement itself does not. However, if a business vehicle is made available for an employee private use, FBT may still arise separately from how the vehicle was financed. That is a question for your accountant.
What happens to a novated lease if I change jobs?
The novation is tied to your employment. If you leave, the obligation generally reverts to you unless your new employer agrees to take over the arrangement. It is one of the more important things to understand before entering a lease.
This article is general information only and does not constitute credit, financial or tax advice. It does not take into account your objectives, financial situation or needs. GST, FBT and deductibility outcomes depend entirely on your individual circumstances, business structure and use of the vehicle — please confirm your position with your accountant or a registered tax agent, and refer to ato.gov.au for current rules, rates, thresholds and the applicable car limit, which change from time to time. Novated leasing is facilitated through a specialist partner; Alpha390 Finance does not administer novated lease arrangements. Alpha390 Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). Lending is subject to approval, lending criteria, terms, conditions and fees. Any comparison rate applies only to the example given and may not include all fees and charges.
Written and reviewed by the Finance Director at Alpha390 Finance
