i am your guide to solar finance for business

Energy savings and resource efficiency

Business

Chattel mortgage

With a chattel mortgage, you buy the solar system by borrowing money. You own the system, but the financier takes a mortgage over the asset (`chattel’). Once the mortagage has been paid off you own the system. The interest rate and repayments are usually fixed for up to five years. The mortgage is an ASIC registered fixed and floating charge against the asset.

Also known as: Bill of sale, equipment loan

Scenario

Below is an illustration of how the cash flows and benefits of a chattel mortgage could work under a realistic, but hypothetical scenario.  

Solar project

Solar system size

30kW

System cost

$46,285

Replacement inverter cost (Assume a new inverter is needed after 15 years.)

$9,355

Cost of daytime grid electricity

$0.21 to $0.28 / kWh

Capacity charge

$0.34 / kW / day

Finance conditions

Proportion financed

100%

Term

7 years

Interest rate

12.5%

Residual payment

0%

The chart below illustrates the annual cash flow outcomes based on this scenario.

Chattel mortgage: cashflow analysis for example 30kW solar PV system

In this chart you can see that the upfront costs are all borne in years 1 to 7. These are offset in part by bill savings resulting in net negative cash flow for those years. This option does not involve a balloon payment, so net cash flow requirements are quite low, less than $1,000 per year during the mortgage. 

For the remaining 18 years the system delivers positive cash flow outcomes through bill savings. The exception is year 15, when this scenario assumes the inverter needs replacing and cash flow dips slightly. The overall Net Present Value is around $53,000. This option has a very healthy Internal Rate of Return of 46%.

 

 

 

Finance details

Period

Principal

Interest Rate

3 -10 years

> $1k

5 to 16%

Fees, charges and other payments

Chattel mortgages usually involve:

  • an establishment fee
  • monthly service fees 
  • exit fees
  • a small amount of stamp duty in NSW
  • possibly mortgage registration fees with ASIC  

You may be able to choose an interest only loan or a balloon payment, in which case you will have to pay a residual at the end of the mortgage. Or you may be able to refinance the asset. You pay for maintenance of the solar system throughout its life. 

Accounting and tax

  • You own the solar system.
  • The asset and liability appear on your balance sheet.
  • You may make tax deductions for fees, interest payments and depreciation of the asset, but not for repayments of the principal.
  • GST is normally payable on the initial asset purchase and fees and charges, but not the mortgage repayments or interest.

Advantages

  • Zero or reduced upfront cost, freeing up cash for other business investments.
  • It won’t affect your ability to borrow for other business purposes.
  • Once the mortgage is repaid you continue to save on power bills for the life of the system.
  • Interest rates for secured finance are usually lower.
  • A fixed interest rate makes budgeting simple.
  • If you repay ahead of schedule, you may be able to draw down that extra amount if you need it.

Disadvantages

  • The mortgage stays with the asset, so if you wish to sell the building while the solar system is mortgaged, it might get complicated.
  • You are typically responsible for the ongoing maintenance and operation of your system.

Risks

  • Energy bill savings may be less than the mortgage repayments, so you may not see net benefits until after the mortgage is repaid.
  • Fees and charges will vary between financiers, so make sure you understand them all.

 

 

 

The performance of any solar finance option is highly dependent on how you and your financier structure the agreement. This includes the amount financed, the term of the agreement, the interest rate charged, fees and charges and any balloon payments or residuals.

Was this page helpful?

Thank you for your feedback.

Would you like to tell us more?

Share this

Share to Facebook Share to Twitter More...
Page last updated: 10 December 2015