Novated lease vs chattel mortgage: which is better for buying a car?

What is a novated lease?

A novated lease is a three-way agreement between an employee, their employer, and a finance company. The employee chooses a car, the finance company purchases it, and the employer agrees to make lease payments directly from the employee’s pre-tax salary.

During the lease term, the finance company owns the vehicle. The employee has possession and use of the car, but does not hold legal title. The employer’s role is to facilitate salary deductions — if the employee leaves, the lease obligation reverts to the employee personally.

Novated leases are popular because they reduce the employee’s taxable income. The lease payments, running costs (fuel, insurance, servicing, registration), and GST savings can make the effective cost of the vehicle significantly lower than paying with after-tax dollars.

What is a chattel mortgage?

A chattel mortgage is a secured loan where the borrower owns the vehicle from day one, but the lender holds a mortgage (a registered security interest) over it until the loan is repaid. Unlike a novated lease, there is no employer involvement — it is a direct arrangement between the borrower and the lender.

Chattel mortgages are particularly popular with self-employed individuals and ABN holders because they allow the borrower to claim GST input credits on the purchase price and to claim interest and depreciation as business expenses. This can significantly reduce the after-tax cost of the vehicle.

The loan typically has a fixed term (3 to 5 years) and may include a balloon payment (residual value) at the end. Once the final payment is made, the lender discharges the mortgage and removes their PPSR registration.

Tax implications compared

Tax treatment is the primary reason people choose one option over the other. Here is how they compare:

• Novated lease — payments come from pre-tax salary, reducing your taxable income. GST on the vehicle purchase price is typically absorbed by the lease structure. Running costs (fuel, insurance, maintenance) can also be salary-packaged pre-tax. However, Fringe Benefits Tax (FBT) applies — the amount depends on the Employee Contribution Method (ECM) used.
• Chattel mortgage — payments come from after-tax income (unless the vehicle is used for business). ABN holders registered for GST can claim the GST on the purchase price as an input tax credit. Interest payments and depreciation can be claimed as business deductions. No FBT applies because there is no employer involvement.

Ownership and end-of-term options

Who owns the car during and after the finance term differs significantly between the two:

• Novated lease — the finance company owns the vehicle throughout the lease term. At the end, the employee has three options: pay the residual value to take ownership, refinance the residual into a new lease, or return the vehicle. The residual (balloon) is set at the start of the lease and is based on ATO minimum residual percentages.
• Chattel mortgage — the borrower owns the vehicle from day one. The lender has a security interest (mortgage) over it until the loan is repaid. At the end of the term, the borrower owns the vehicle outright. If there is a balloon payment, it must be paid to clear the title.

This ownership difference matters if the vehicle is sold during the finance term. For a chattel mortgage, the seller owns the car but must discharge the lender’s PPSR registration. For a novated lease, the leasing company must be involved in the sale. In both cases, a buyer should always run a finance check before purchasing.

Which option suits your situation

• Choose a novated lease if you are a full-time PAYG employee, your employer supports salary packaging, and you want to reduce your taxable income. Novated leases are most beneficial for employees in higher tax brackets.
• Choose a chattel mortgage if you are self-employed, a sole trader, or operate through a company with an ABN. You will benefit from GST input credits, interest deductions, and depreciation — and you will own the vehicle from day one.
• Consider other options if you do not have an ABN and your employer does not offer salary packaging. In that case, a standard secured car loan or a personal loan may be more straightforward.

PPSR implications for used car buyers

Both novated leases and chattel mortgages result in a security interest being registered on the PPSR. If you are buying a used vehicle, this is what you need to know:

• A vehicle previously financed through a novated lease or chattel mortgage will show a PPSR registration until the finance is fully discharged by the lender.
• If the seller claims the finance has been paid off, the PPSR should reflect this — the lender is required to remove the registration within five business days of discharge. If the registration is still active, the finance has not been cleared.
• If the vehicle still has active finance, you may need to arrange a simultaneous settlement to protect yourself during the transaction.

A RegoVerify Quick Check ($4.99) includes a PPSR search that will reveal any active security interests — whether from a novated lease, chattel mortgage, hire purchase, or any other form of vehicle finance. For more on what to do if finance is found, see our guide on what happens if you buy a car with money owing.