Novated Lease vs Chattel Mortgage Comparison | NLA | Novated Lease Australia

What’s the difference between a lease and a chattel mortgage?

Depending on the situation there are a few different ways you can pay for a work vehicle, including a novated lease and a chattel mortgage. They both offer unrestricted use of a new or used vehicle for a combination of business and personal use, but with some key differences in terms of how the finance works:

With a chattel mortgage

An asset finance provider lends a lump sum that can be used to purchase a vehicle, with the vehicle acting as security for the loan. The finance is provided to a business and must be primarily for businesses, but the vehicle can be used in part for personal use.

With a novated lease

An employee pays for their choice of car and its running costs directly through their salary with an income tax saving. The can can be used for a combination of business and personal use or, unlike a chattel mortgage, entirely for personal use.

Now, let’s look at the differences between the two in a bit more detail.

Novated lease vs chattel mortgage

	Novated lease	Chattel mortgage
Who’s involved	You, your employer and a novated lease provider.	A borrower and a chattel mortgage lender.
Vehicle ownership	With a novated lease, you don’t own the vehicle during the lease term. But you have unrestricted personal use of the vehicle throughout the lease, with the option to own it at the end of the term.	With a chattel mortgage, the borrower owns the vehicle from the start. It effectively becomes a business asset.
Vehicle usage	Can be used solely for personal use, or a combination of business and personal use.	A chattel mortgage is only available if the vehicle is used for business purposes at least 51% of the time.
Restrictions	A novated lease is only available on passenger vehicles with a payload capacity below one tonne. Vehicle age restrictions usually apply.	A chattel mortgage can be used to finance any type of business vehicle or asset. Vehicle age limits generally apply.
Upfront discount on car	With a novated lease there is a GST discount of up to $6,334 on the purchase price of the car (in FY 2025/26). Novated lease companies can also often secure a ‘fleet discount’ for clients.	Eligible businesses can generally claim back the GST paid on a vehicle purchased with a chattel mortgage.
How are the payments made?	Your employer deducts the novated lease payment amount from your salary and pays it to the lease provider every time you get paid.	The borrower makes the chattel mortgage repayments directly to the lender – generally weekly, fortnightly or monthly.
What do the regular payments cover?	The cost of leasing the vehicle Related car-running costs (e.g. fuel/charging, insurance, registration and CTP, servicing and tyres) Finance costs and admin fee	The mortgage amount (loan principal) Interest and fees
Tax implications	Up-front GST discount on vehicle cost Income tax saving as the lease payments lower your taxable income GST saving on packaged car-running costs Lease may be subject to fringe benefits tax (unless it’s an eligible EV)	Business can claim back the GST on the vehicle purchase Interest and fees are generally tax deductible (based on the percentage of business use of the vehicle) Repayments of the loan itself (the principal) are not tax deductible
Interest rates	Novated lease interest rates vary based on your application and credit history. The interest rate is fixed for the life of the lease.	Chattel mortgage interest rates vary based on the borrower’s application and credit history. The interest rate is usually fixed for the life of the loan.
Fees	Finance establishment fee Regular novated lease admin fee	Finance establishment fee Regular car loan servicing fee
Insurance requirement	Vehicle must be covered by comprehensive car insurance. The cost can be packaged into your lease with a potential tax saving	A chattel mortgage is recorded on the business balance sheet, as is the asset it has funded
Balloon payment	Known as the ‘residual payment’, this is a larger one-off payment required at the end of the novated lease for you to own the car outright.	You may have the option to include a balloon payment at the end of your chattel mortgage term. This is a large one-off payment that lowers the regular repayments.
Options at the end of the term	Make the residual payment to own the car outright. Trade in the car and start a new lease with a new car. Renew/extend your lease with the same car.	At the end of the chattel mortgage term the loan is closed out and any obligations to the lender end.
How long is the term?	A novated lease term can be any duration between six months and five years.	Chattel mortgage terms are generally between one and seven years.
Eligibility	Must be an employee of a company that offers novated leasing as a benefit. Must be an Australian citizen or permanent resident. Must be over 18 years of age. Must pass a credit check and meet the finance provider’s other criteria (bad credit novated leases are available).	Must be an Australian citizen or permanent resident. Applicant must have a valid ABN and be over 18 years of age. Must pass a credit check and meet the finance provider’s other criteria. Must be using the vehicle for business at least half of the time.

Novated lease vs chattel mortgage tax and GST benefits in more detail

Novated lease

A novated lease uses an employee’s pre-tax and post-tax salary to make finance repayments to a leasing company. The pre-tax payments reduce the employee’s total taxable income, which can even place the employee into a lower tax bracket, resulting in significant tax savings.

For eligible EV novated leases, 100% of the novated lease payment can be made using pre-tax salary, as these vehicles are exempt from fringe benefits tax.

As the novated leasing company procures the vehicle, there is a GST discount (up to $6,334 in FY 2025/26) on the initial purchase price of the vehicle.

The leasing company will estimate running costs for the vehicle, which are included in regular novated lease payments. Running costs include most things you might pay for in relation to the vehicle’s use throughout the term, such as:

Registration and CTP
Car insurance
Servicing costs
Replacement tyres
Petrol or charging costs
Vehicle repairs

You pay no GST on running costs for your vehicle under a novated lease.

Chattel mortgage

Chattel mortgages are only used to finance business vehicles, which allows a business to immediately take advantage of the tax benefits of ownership. If your business is registered for GST on a cash basis and uses a chattel mortgage to purchase a vehicle:

The vehicle becomes an asset on the business’s balance sheet
You can claim the initial purchase-price GST back on your next Business Activity Statement (BAS) following the establishment of the chattel mortgage.

Depreciation on the vehicle can be claimed through your end-of-year tax return. As the vehicle is registered as a business asset, interest on your chattel mortgage is also tax-deductible. You can only claim tax deductions on eligible expenses based on the proportion of the vehicle use that is business related, according to the ATO.

Novated Lease vs chattel Mortgage: Pros and cons

Novated lease pros

The vehicle can be used exclusively for personal use, business, or a combination of the two.
Convenient salary packaging of the vehicle’s running costs in addition to the lease.
Tax benefits (GST and income tax) - this is a major advantage if a novated lease.

Novated lease cons

Only available to PAYG employees.
Vehicle must not exceed a maximum payload of 1,000 kg.
Cannot be used for machinery or delivery trucks and vehicles.

Chattel mortgage pros

Vehicle recognised as a business asset, with finance interest and fees being tax deductible (for business use portion).
Business can reclaim the GST on the vehicle’s initial purchase in the next BAS.
Can be used for non-passenger vehicles.

Chattel mortgage cons

Monthly instalments and the residual balance (balloon) are not tax-deductible.
Accounting work involved in claiming GST and deductions can involve more work than using a novated lease.
Vehicle must be used for business purposes at least 51% of the time.

Below are some sample calculations showing the cost of a novated lease versus a car loan, but if you want to estimate novated lease costs for yourself, you can try our novated lease calculator.