The Secrets of Yacht Financing
You can purchase a new Wally 58x for $3.0m, or utilize marine financing to leverage your cash elsewhere.
Learn the unspoken benefits, how to avoid higher rates and an expert’s Top Tips to maximize your loan opportunity.
Yacht financing is undeniably misunderstood, from its surprisingly easy access to the nuances of complex inputs affecting your rate and approval. That’s why I sat down with Noelle Norvell, a 30-year lending expert with Luxury Financial Group and set the record straight on the details which make or break a buyer’s financing experience. Yacht financing isn’t as complicated as it’s made out to be if you follow a few key steps. There are even a few tricks of the trade to help you get the most out of your money.
The marine financing structure parallels the well-known home lending structure, where a varying down payment and a set of inputs yield a principal and interest payment paid over the life of the loan. In yacht finance the loan amortization can stretch up to 20 years. As with home lending, there are different structures to choose from, which is where a partner like Norvell comes in. Her Luxury Financial Group orchestrates financing for some of the market’s top deals, while basing its advantages on transparency and client preparedness. Norvell has seen it all in the financing space, with one of the more frequent occurrences being a disappointed client who received an early aggressive rate from a competitor only to see it change once the vessel’s use and mooring was vetted. “We can always provide the best rate out there; however, we don’t want to miss on rate expectations when they add in an LLC, a foreign delivery or limited charter.”
Know before you go
A summary of the important factors to understand before getting your first rate quote.
Rates differ based on use of the vessel: charter, limited charter or personal use
Be up front with intended charter use, inclusion of LLC ownership, and unique cruising destinations
Rates usually lag behind the prime rate and sit above the fixed 30-year mortgage rate, depending on cost of funds
Recent changes to lender requirements have seen lenders hike rates between .125 and .25% for those buying under an LLC
Joint applicants must qualify separately for the loan, instead of in the past where banks considered joint applicants within the married parameters
Your lender will likely want a say in the terms of your insurance requesting a 2%-3% hull deductible
The Hidden Advantages
One of the frequent and fruitful customer “surprises”, as Norvell recounts, is the moment they realize only the vessel is collateralized in the loan. “They have been told, or perceive themselves, that we have to take additional collateral, which is not the case,” Norvell explained. “No real estate. No additional collateral. We only take the boat.” Certainly a relief to those constantly looking to maximize their assets. What’s more, if your boat has a berth, a head and a galley, you can utilize an IRS code to reduce interest expense.
Through working with an experienced marine lender, you’ll plug in an expert between you and your CPA/CFO to maximize tax and depreciation benefits, along with an additional party to advise on accessories like insurance structuring. New business opportunity or need liquidity? Restructuring your loan is welcomed to address a change in your financial climate.
IMPORTANT NOTE: Lending partners and loan brokers provide different services. All providers may not be able to fulfill all the benefits mentioned in this article. Chat with your provider prior to engaging to make sure you receive the services you’re seeking.
Minimizing Your Rate
Although great financing benefits exist, it is just as important to understand the factors which can negatively affect your rate quote.
Yacht financing - relative to lending on other asset types - has a surprisingly low risk profile for lenders, even though the loan’s collateral is a floating bundle of electrical wire surrounding a combustion engine. Since the ’08 recession and the post-Covid stabilization, lenders depend on a trustworthy and cookie-cutter system, paving an easy road for those that qualify while passing on riskier plays. Factors like BVI, USVI, Alaskan or Hawaiian mooring locations, non-married joint applicants and even the involvement of an LLC can hike rates. Norvell shed light at just how much an LLC may move the needle, “Lenders have been spending a lot of time in their legal departments approving LLC’s in the last 18 months, and half of them now charge a rate bump of between .125-.250% for LLC’s, while some lenders don’t accept it anymore due to legal entanglements they get into with the borrower”.
Back in ’08-’09, the market saw a lot of tandem purchasers – one with liquidity and one with income – who were buying boats “hand over first”. Lenders would qualify the borrowers as married individuals. Once the market crunched, one borrower would bail on the other, and last man standing was unable to cover the monthly payment. Payments stopped coming and the marine delinquencies experienced an uptick. As mitigation going forward, all unmarried borrowers must qualify separately. “We navigate that process for (multiple) borrowers. It’s not insurmountable by any stretch; we take care of logistics and (qualifying) ratios to make it as easy as possible”.
Noelle’s Top 4 Ways to Get the Most Out of Your Yacht Loan
1 - Don’t Disregard Cash Recapture
If you’re able to close in cash and it gives you leverage in closing, utilize a cash recapture program to keep shortly thereafter to recoup your funds.
2 - Connect your lending partner with your accountant
You’ll get no better service than a great lender partner dealing directly with your accountant to maximize the tax and depreciation opportunities on your purchase to reduce your interest expense.
3 - ReADY YOUR RETURNS
Most deals require at least your two most recent tax returns. The most likely closing delay is caused by tax documents not being available. Talk to your financing partner prior to signing a purchase agreement to make sure your closing won’t be held up by activities related to the approval of your loan.
4 - Match your lender terms with insurance terms
When stipulations like limited charter or available cruising area don’t match up between the two providers, you risk loss of the boat, loss of insurance, or both. Keep a keen eye to the fine print to make sure your policies are as you presented them to stay away from unwanted surprises.
Support Beyond Delivery Day
Once the deal inputs are sorted and the purchase is closed, you can remain active with your lending partner for various services. Redocumentation, insurance renewal, loan restructuring, and most importantly as a point of contact related to changes on your boat’s use profile which may affect your lender/insurer relationship. If you change your permanent mooring location, your lender and insurance must be notified, and Norvell says you can give them a call to handle it, “That’s the value of having a partner in the marine industry for over 30 years.”
For more information on marine financing on a current vessel or a future purchase, contact us.
For more information on Noelle Norvell and the Luxury Financial Group, contact Noelle at noelle@lfg.money.
