Real estate property consists of land or buildings that can’t be moved. People purchase real property, usually with a traditional mortgage. Chattels are movable property that can be anything like jewelry, a car, a boat, furniture, electronics, and even a mobile home. So then, what is a chattel mortgage? People often obtain a chattel mortgage to buy movable assets. In this post, you’ll learn more about chattel mortgages and how they work.
What Is a Chattel Mortgage?
A chattel mortgage is a loan for a mobile or manufactured home or a tangible movable asset such as business equipment, machinery, or any type of vehicle. In a traditional mortgage, the borrower uses the loan amount to purchase a stationary or fixed property known as real estate. An immovable property includes land, things attached to the land, and the benefits that arise from it. Whereas with chattel mortgages, the borrower uses the loan to purchase a movable property.
With a chattel mortgage, the movable assets (whatever they might be), are used as collateral in the loan. This means that if the borrower defaults on the loan, the lender can take possession of the chattel or sell it and use the proceeds to recover the loan. On the other hand, if the borrower pays off the loan, the ownership of the chattel is transferred to the owner.
Features of a Chattel Mortgage
With chattel mortgages, the repayments are usually structured over 2 to 5 years. The interest rates for chattel mortgages are lower than unsecured loans. The following are the two main features of a chattel mortgage:
A balloon payment is a residual amount that is not paid off until the loan matures. The higher the balloon payment of the chattel mortgage, the lower the monthly payments. However, higher balloon payments will also increase the interest the borrower will pay on the loan. A balloon payment is a good choice if the borrower wants to keep the repayments low to improve their cash flow. However, the borrower must ensure they can pay the balloon payment or residual amount in a single lump sum payment.
Purchasing equipment or vehicles with a chattel mortgage has some tax benefits. For instance, the borrower can claim interest payments paid on the chattel mortgage. The interest paid on this loan can be deducted as an annual income tax return, but it should be for business purposes. The borrower can also claim the depreciation value and GST (Goods and Services Tax) credit.
How Does a Chattel Mortgage Work?
A chattel mortgage works similarly to a fixed-rate traditional mortgage. Generally, this mortgage is carried out between two parties: the debtor and the creditor. The mortgage agreement allows the creditor to offer funds to the debtor to purchase a movable property. The debtor agrees to repay the mortgage monthly over a few years.
The chattel acts as collateral, and if the debtor fails to repay the mortgage, the creditor has the right to seize the chattel. On the other hand, if the creditor repays the entire mortgage, the ownership of the chattel will be given to the debtor. The borrower can also choose payment frequency and can choose to make a balloon payment. A balloon or residual payment is a lump sum the borrower can pay in a single payment at the end of the loan term. The following are the options available to settle a balloon payment:
- Refinance to pay the residual amount of the loan
- Pay the residual amount and get the title of the chattel
- Sell the chattel and use the proceeds to start a new loan
Types of Chattel Mortgages
Chattel mortgages are of different types according to the kind of movable property to be financed. The following are the main types of chattel mortgages:
Chattel Mortgage for Mobile Homes
Mobile homes, now known as manufactured homes, can be financed with chattel mortgages. These are movable homes and can be relocated on leased lands. A traditional mortgage can’t fund these properties because the borrower doesn’t own the land; they only own the manufactured home.
Chattel Mortgage for Vehicles
A chattel mortgage can be used for financing the purchase of a vehicle for business purposes. Chattel mortgages for cars are common in countries with a GST, as the borrowers can obtain tax benefits.
Chattel Mortgage for Equipment
A chattel mortgage can be used for purchasing large equipment such as tractors, forklifts, and other farm equipment. These types of mortgages are mainly used for utilizing the machinery temporarily and then releasing the chattel after use. The mortgage allows the borrower to keep using the equipment while they pay off the loan.
Chattel Mortgage for Modular Homes:
Modular homes are manufactured homes, but they are not as mobile compared to manufactured ones. Instead, they have a more strong and more permanent foundation. However, since the modular homes can’t be moved once placed, they qualify for traditional mortgages too.
Chattel Mortgage vs. Finance Lease vs. Hire Purchase
|Type of Finance||Asset Value||Application||Ownership||Lifespan of assets|
|Chattel Mortgage||High||Mobile homes, vehicles, machinery||Full||Long-term|
|Finance Lease||High||Large machinery, medical equipment||Ownership benefits||Long-term|
|Hire Purchase||Medium||Tools, equipment||No ownership||Medium-term|
Chattel Mortgage Examples
Example: Suppose Sally is looking to purchase $100,000 of machinery for her company. She obtains a chattel mortgage from a bank to finance the purchase. The following are the details of the chattel mortgage:
- Mortgage amount: $100,000
- Term: 5 years
- Interest rate: 6%
- Balloon payment: 40%
- Monthly payments: $1353.2
Sally has to pay $1353.2 monthly payments and a residual amount of $40,000. Once the mortgage is complete, Sally will get ownership of the machinery.
Example 2: Henry wants to purchase a mobile home because of the nature of his job; it keeps shifting from city to city. He looked for a mobile home and then contacted a bank to finance the purchase. The mobile home costs $350,000, and the lender requires a 30% balloon payment. The following are the details of the chattel mortgage that Henry has agreed to:
- Mortgage amount: $350,000
- Term: 3 years
- Interest rate: 7%
- Balloon payment: 30%
- Monthly payments: $8277.27
Henry has agreed to obtain the loan and repay $8,277.27 to the lender on a monthly basis. Besides that, he also agrees to make a balloon payment of 30%, that is, $105,000, at the end of the term. After three years, the mortgage will end, and Henry will have title of the mobile home.
Frequently Asked Questions
What are the Benefits of a Chattel Mortgage?
A few benefits of chattel mortgages are that they are short-term loans. These loans have lower processing fees and less stringent credit requirements. Chattel mortgages also offer flexible funding structures that are tailored to your needs. Another benefit of this loan is that the asset value must not need to match the mortgage size. With chattel mortgages, the borrower can draw funds as a lump sum or in installments.
What are the Disadvantages of a Chattel Mortgage?
A few disadvantages of a chattel mortgage include higher interest rates and few lenders’ options. Besides that, the borrower has to pay for the maintenance of vehicles, machinery, or equipment in a chattel mortgage.
What Can Be Financed with a Chattel Mortgage?
With a chattel mortgage, the borrower can finance mobile homes. A mobile home is a pre-fabricated structure placed on a trailer chassis. Besides that, chattel mortgages can also be used to finance industrial items such as machinery or equipment, precious metals, artwork, valuable vehicles, ships, and aircraft.
How to Qualify for a Chattel Mortgage?
To qualify for a chattel mortgage, the borrower must finance a vehicle they will use for the business for at least 51% of the time.
What are the Alternatives to a Chattel Mortgage?
Chattel mortgages aren’t suitable for everyone. If someone is interested in buying fixed homes, FHA loans are a great option as they require very low down payments. Besides that, anyone who’s looking to purchase modular homes can use conventional loans. Modular homes are types of prefabricated homes that are made from prefabricated components that are made in a factory. Once all the components of a modular home are brought to the construction site, they are joined to create a single home. Modular homes are built in a similar way as we build Lego blocks.
What is the Difference Between a Manufactured Home and Mobile Home?
A manufactured home is designed in a factory and can be set on a permanent block. These homes are not intended to be moved anywhere. On the other hand, mobile homes can be moved from one place to another, and they may or may not have metal tie-downs.
What to Know for the Real Estate Exam
A chattel mortgage is a mortgage for financing a tangible movable property such as equipment, a vehicle, or a manufactured home. The movable property, in this case, acts as collateral and secures the loan. Since the loan is secured, if the borrower defaults on the loan, the lender can own the property, and the borrower can lose it. A chattel mortgage is different from a traditional mortgage. The main difference is that the property is stationary with conventional mortgages, and for the chattel mortgage, the property is movable. There are more real estate terms that you can learn before appearing for a real estate exam.