What Is a Balloon Payment?
A balloon payment (sometimes called a residual value) is a lump sum that you agree to pay at the end of your loan term instead of paying it off in equal installments. It effectively defers a portion of the principal, which reduces the principal being repaid each month — and therefore reduces your monthly repayments.
Worked Example
$100,000 chattel mortgage, 7.5% p.a., 60-month term:
The 30% balloon saves $398/month — but $30,000 is owed at the end of month 60.
Balloon Scenarios — Repayment Comparison
These figures assume a $100,000 chattel mortgage at 7.5% p.a. over 5 years. They illustrate the trade-off between repayments and balloon size.
| Balloon % | Balloon Amount | Monthly Repayment | Total Interest Paid |
|---|---|---|---|
| 0% (no balloon) | $0 | $2,001 | $20,060 |
| 10% | $10,000 | $1,872 | $22,320 |
| 20% | $20,000 | $1,737 | $24,220 |
| 30% (most common) | $30,000 | $1,603 | $26,180 |
| 40% | $40,000 | $1,468 | $28,080 |
Indicative only. Actual figures depend on your exact rate. Use the calculator for precise numbers. Total interest increases with balloon size because more principal is deferred and interest accrues on it throughout the term.
Your 3 Options When the Balloon Comes Due
1 Pay the Balloon in Cash
The simplest option. If you have the funds, you make the final lump sum payment and own the asset outright with no encumbrances. Best for businesses that have strong cash reserves at term end or have been setting funds aside.
2 Refinance the Balloon
Roll the balloon into a new loan. This restarts the repayment cycle — you'll make repayments on the residual amount (possibly with a new balloon of its own). Common when you need to keep using the asset but prefer not to make a large lump sum payment.
3 Sell the Asset
Sell the asset and use the proceeds to pay the balloon. If the market value exceeds the balloon amount, you keep the surplus. If the asset has depreciated to below the balloon, you need to cover the shortfall. This is why setting a realistic balloon relative to expected residual value matters.
Unlike Finance Leases — You're in Control
With a finance lease, the ATO sets minimum residual percentages that must be met. With a chattel mortgage, the balloon is entirely your choice. You own the asset, so there's no prescribed residual. This flexibility makes it much more suitable for assets that depreciate quickly or unevenly.
How to Set the Right Balloon
The right balloon depends on three things: your monthly cash flow needs, how long you intend to own the asset, and what you expect the asset to be worth at the end of the term.
General Guidelines
- Vehicles used 5+ years: A 20–30% balloon is common, aligned with typical residual market values for well-maintained vehicles.
- Short-term asset use (2–3 years): A higher balloon can work well if you plan to sell the asset before or at term end, since market value depreciates less in shorter periods.
- Long-lived equipment (excavators, CNC machines): Residual market values can be highly variable — conservative balloons (0–20%) reduce end-of-term risk.
- IT equipment, computers: Technology depreciates rapidly. A lower balloon is prudent to avoid being underwater at term end.
⚠ Negative Equity Risk
If you set a balloon too high relative to the asset's actual residual value, you may be in a "negative equity" position at term end — where the asset is worth less than the balloon. This can be a problem if you're relying on asset sale proceeds to cover it. Work with your broker to set a balloon that aligns with realistic market depreciation.
Model Your Balloon Options
Try 0%, 20%, 30% and 40% balloon scenarios side by side in the free chattel mortgage calculator.
Open Balloon Calculator →Chattel Mortgage Balloon vs Finance Lease Residual
| Chattel Mortgage Balloon | Finance Lease Residual | |
|---|---|---|
| Set by | You (negotiated with lender) | Must meet ATO minimum percentages |
| ATO minimums apply? | No | Yes — cannot go below ATO schedule |
| Balloon/residual amount | 0% to ~40% (flexible) | ~28–65% depending on term |
| At end of term | 3 options: pay, refinance, sell | Must pay residual or extend lease |
| Ownership during term | You own the asset | Lender owns the asset |
| GST on residual | No (you already own it) | GST component on final payment |
For more detail on the full structural comparison, see Chattel Mortgage vs Finance Lease.
Balloon Payment FAQs
No. Balloons are completely optional on a chattel mortgage. You can set the balloon at 0% and simply repay the full loan in equal installments with no residual owing. This maximises your equity in the asset but results in higher repayments. Many businesses prefer no balloon for assets they plan to keep for the long term.
It depends on your loan terms. Some lenders allow additional repayments; others charge early repayment fees. If paying down the loan faster is important to you, check the loan terms before signing. Some lenders offer "redraw" facilities on chattel mortgages that allow extra payments and access to those funds if needed.
The balloon payment itself is not directly tax deductible — it's a principal repayment, not an interest expense. However, the interest component that accrues on the deferred principal (the balloon) throughout the loan term is deductible. Your depreciation claims are also unaffected by whether you have a balloon — you depreciate the asset at the same rate regardless.
Most lenders allow balloons up to 40% of the original loan amount, though some may go to 50% on certain assets and structures. The maximum is typically governed by the lender's credit policy and the asset type. Lenders will generally not approve a balloon that exceeds the expected residual value of the asset at term end.
The balloon is set at the time of the loan contract and generally cannot be changed mid-term. If your circumstances change significantly, some lenders may allow refinancing the loan (which would set a new balloon), but this typically incurs break costs and establishment fees. It's important to think carefully about the balloon amount before signing.