What is a balloon payment?
A balloon payment is the agreed amount that remains at the end of an equipment finance term. Choosing a balloon reduces your scheduled repayments during the term and leaves a lump sum to deal with at maturity. In loan products (e.g., chattel mortgage or modern commercial hire purchase) it’s typically called a balloon. In a finance lease, it’s called a residual value and must meet ATO minimums.
- Lower repayments now, higher amount later
- Useful for cash flow smoothing or aligning with asset turnover
- End‑of‑term choices: pay out, refinance, or trade/sell the asset
GST treatment: balloons, repayments and leases
For businesses registered for GST, the treatment depends on product type:
- Chattel mortgage and modern commercial hire purchase: GST is generally payable on the purchase price up front. Regular repayments and the balloon (principal component) typically do not attract GST. Certain fees and charges may include GST. See ATO guidance: Hire purchase and leasing arrangements and Purchasing a motor vehicle (principles are commonly applied to business equipment).
- Finance lease: Lease rentals generally include GST, and the residual is set in line with ATO minimums. Input tax credits can usually be claimed on lease rentals if you’re eligible and registered for GST.
Always confirm GST treatment for your exact facility and circumstances with your accountant or tax adviser.
ATO finance lease residual guidelines (safe harbour)
Lenders align to ATO “safe‑harbour” minimum residual values for finance leases. For common 1–5 year terms, the minimum residual (as a % of the original cost) is typically:
- 1 year: 65.63%
- 2 years: 56.25%
- 3 years: 46.88%
- 4 years: 37.50%
- 5 years: 28.13%
These are commonly applied to vehicles and are used by many lenders as a reference point for yellow goods and other plant to ensure tax compliance. Confirm the applicable minimum for your specific asset and term. See ATO guidance on hire purchase and leasing arrangements.
How a balloon affects repayments and pricing
A higher balloon lowers your scheduled repayments because you’re deferring more principal to the end. Headline interest rates are mostly driven by the asset (type, age, hours), loan‑to‑value ratio and your credit profile. However, some lenders may price slightly higher when the balloon is large due to higher residual risk, or they may keep the rate but limit the maximum balloon.
- Higher balloon → lower monthly repayment, larger final amount
- Some lenders load price marginally for big balloons/residual risk
- Too‑high balloons can be declined or require stronger supporting factors
Worked example: repayments with and without a balloon
Assumptions: $250,000 amount financed; 5‑year term (60 months); 9.00% p.a. fixed; monthly in arrears; fees excluded; loan structure (not a lease).
- With a 20% balloon ($50,000): approx. monthly repayment ≈ $4,526
- With no balloon: approx. monthly repayment ≈ $5,187
Formula (monthly): Payment = [r × (PV − B/(1+r)^n)] ÷ [1 − (1+r)^−n]
Where PV = amount financed; B = balloon at end; r = monthly rate (APR/12); n = number of months.
Show the calculation steps for the balloon case
r = 0.09/12 = 0.0075; n = 60; PV = 250,000; B = 50,000
Discounted balloon = B/(1+r)^n ≈ 50,000 / 1.5657 ≈ 31,938
PV − discounted balloon = 250,000 − 31,938 = 218,062
Denominator = 1 − (1+r)^−n ≈ 1 − 1/1.5657 = 0.3613
Payment ≈ (0.0075 × 218,062) / 0.3613 ≈ 1,635.47 / 0.3613 ≈ 4,526
Quick balloon repayment calculator
Typical fees and early payout costs
- Establishment/doc fee: commonly $0–$695 depending on lender and facility size.
- PPSR registration: government fee plus admin (often $6–$25 government charge plus a small admin fee).
- Monthly account/admin fee: sometimes applies on leases/loans.
- Early payout/break costs: may include interest adjustment, a fixed early termination fee and pro‑rata admin. Finance leases can include residual recalculation and GST on certain components—confirm with your lender.
- End‑of‑term fee: a small fee can apply for payout processing or transfer of title.
End‑of‑term: what to do 60–90 days before maturity
- Request a payout letter: obtain the balloon and final payout amount in writing (and any daily interest).
- Choose your path: pay out in cash, refinance the balloon, or trade/sell and apply equity to clear the amount.
- If refinancing: line up approval, sign docs, and schedule settlement before due date.
- PPSR and title: once paid out, the lender arranges PPSR discharge and title transfer (commonly 5–10 business days after clearance).
- Insurance: update your insurer to reflect the new interest (new lender or unencumbered).
Asset‑specific guidance for common construction equipment
Indicative balloon ranges below assume prime assets, sensible hours and 4–5 year terms. Actual outcomes depend on age, brand, attachments, hours/usage, resale depth and your credit.
- Excavators (3–35t): 10–30% typical. Watch hours, undercarriage condition and brand demand.
- Wheel loaders: 10–25% typical. Consider bucket/tyre wear and quarry vs. civil use.
- Skid steer loaders: 10–30% typical. Smaller ticket size often supports a broader range.
- Cranes (mobile/tower): 0–20% typical. Often lower residual appetite due to specialised markets and compliance/inspection requirements.
For older or high‑hour assets, lenders may cap balloons or shorten terms. Where strong secondary markets exist (top‑tier brands, well‑documented service history), higher balloons may be acceptable.
Documentation lenders may ask for
- ABN/GST status, trading history and bank statements
- Asset details (make/model, year, hours, serial/VIN), supplier quote
- Financials or low‑doc alternatives (depending on exposure and profile)
- Insurance certificate noting lender’s interest
FAQs
Is a balloon the same as a lease residual?
No. A balloon typically applies to loan products (e.g., chattel mortgage, commercial hire purchase). A residual is for finance leases and must meet ATO minimums. Commercially, both reduce repayments and leave a final amount to manage.
Does a balloon change the interest rate?
Rates are mostly driven by asset and credit risk. Some lenders may price slightly higher if the balloon is large due to residual risk, while others keep the headline rate and adjust the maximum allowable balloon.
How does GST apply to repayments and the balloon?
For chattel mortgage and modern hire purchase, GST is generally on the purchase price up front, and the principal component of repayments and the balloon typically does not include GST. Fees may include GST. See ATO: Hire purchase and leasing arrangements.
What residual must I choose on a finance lease?
Lenders follow ATO minimum residuals (safe harbour). For 1–5 year terms these are about 65.63%, 56.25%, 46.88%, 37.50% and 28.13% respectively. Confirm the applicable rate for your asset and term.
Can I refinance the balloon?
Yes. Many businesses refinance the balloon into a new 1–5 year term, pay it out, or trade/sell to clear it. Start the process 60–90 days before maturity.
What fees apply at the end?
Expect a small payout/admin fee. If exiting early, there can be break costs. After payout, lenders discharge the PPSR and update title.
Which product suits a balloon?
Chattel mortgage and modern commercial hire purchase commonly use balloons. Finance leases use residuals (ATO minimums). Compare chattel mortgage vs lease.
Get help with your construction equipment finance balloon
Have us compare lender‑aligned balloons and repayments for your excavator, loader, skid steer, crane or other plant. We’ll outline GST treatment for your product type, typical fees and your end‑of‑term options.
Key takeaways
- A balloon lowers repayments but leaves a final amount—plan 60–90 days ahead.
- For chattel mortgage/modern hire purchase, GST is generally upfront on purchase; principal in repayments and the balloon typically do not include GST (fees may).
- Finance leases must meet ATO minimum residuals; lenders align to these.
- Some lenders may price slightly higher for large balloons due to residual risk.
- Match the balloon to real‑world resale and your cash flow—especially for excavators, loaders, skid steers and cranes.