Last month we spoke to Mark O’Donoghue at specialist boat finance company Finlease about the common problems boaties face when looking for the perfect boat loan. Finding a boat you want to buy is rarely a problem, however funding the purchase often can be. Now we’ll continue by outlining two popular finance packages that you may like to investigate if you’re about to buy a boat. It’s the first in our series of articles about how to make owning your dream vessel a financial reality.
Back Cove 26
A charter and pleasure boat finance expert, Mark O’Donoghue said that spending a little bit of extra time researching finance packages before signing on the dotted line is a wise course of action. Many people are so excited by the prospect of taking home their new boat that they will literally sign the first bit of paper their broker or bank sticks under their nose, often failing to understand the long term ramifications of their decision.
Boaties should ask themselves the following questions before committing to any finance package. Do I understand the structure of this loan and my repayment commitments and are there any early termination costs? What is the interest rate and is the loan secured by just the boat? How long do I intend to keep this vessel and what am I going to use it for? And what are the likely tax & GST ramifications, if any, of this lending arrangement and purchase?
Interest only loans
One type of loan that boaties may like to consider is an interest only package. Finlease has one product available for the purchase of a private use boat (i.e. a pleasure vessel rather than a vessel intended for charter) where the borrower pays only the interest on the loan for a fixed period of time.
Provided you have a deposit of at least 20%, Finlease can offer interest only loan repayments for an 18 month period. O’Donoghue explained that this product is suitable for people intending to replace or upgrade their boat within a relatively short period of time.
Interior of Andrew Short Marine Showroom at Taren Point
‘There are some products out there which are interest only. And that can be an option for someone who is looking to keep the boat for a shorter period of time, they’re really trying to keep their payments down, they know the value is in the boat and they’re probably going to upgrade in 18 months time to another boat.’
At the expiry of the 18 month period, the borrower can choose to roll over that interest only period to his or her next purchase ‘with a bit more equity to go in’ or to convert it into a long term debt. The interest only product could be attractive to someone looking to buy their first vessel, intending to upgrade to a larger vessel quite soon but also looking to keep their initial repayment costs down.
Maritimo showcase at Aussie Boat Sales
Consumer Credit Act Loans
Consumer Credit Act Loans are of interest if you’re an individual looking to borrow money for a private use boat (rather than a charter vessel). O’Donoghue commented that one of the biggest attractions of these types of loans is their flexibility: if you want to exit the agreement early the fees are likely to be in the hundreds rather than the thousands of dollars.
‘The extreme advantage in these consumer based loan products is that there are miniscule early termination costs.’
In most normal commercial agreements (whether it’s hire purchase, finance lease or chattel mortgage) there are usually hefty penalties if you want to end the agreement early. Mark said that although these types of agreements often offer very good facilities, their structure may not suit all borrowers, and he suggests people consider the relative flexibility of the Consumer Credit Act Loans.
Stacer in action
Loan secured against the boat, not real estate
Another advantage of the Consumer Credit Act Loans, otherwise known as UCCC, is that Finlease can fund up to 100% of the purchase price of the boat. This loan is secured against the boat itself, so real estate doesn’t have to be used as security.
‘We can fund it over a period of five years with a residual or a balloon at the end of up to 40%. And if they’ve got a long term view of that boat they can simply roll that residual to a second term. And so create a two stage debt over ten years or longer.’
‘Let’s say I’m the buyer and I’ve brought myself a 36 foot flybridge and I put it on a five year term with a 40% balloon. Three years down the track I decide that the new 40 footer is a much nicer opportunity for me. I can exit my 36 footer agreement without getting hit with any great penalties on the way up.’
‘That’s a great degree of flexibility for buyers; they’re not locked in long term and don’t have to wait to the end of that five years.’
Mainship 43 Trawler seen from above
What if you’ve brought a second boat before selling the first?
Consumer Credit Act loans are also useful when the boat owner buys a second boat before selling his or her first vessel. This situation sometimes happens when the broker handling the purchase of the second vessel offers a lower than expected trade in for the first vessel; knowing the first vessel’s market value, the owner will sometimes choose to wait for a better offer.
‘Just say I’m in a 36 foot boat, it’s two years down the line and I see this really nice 40 footer that I’d like to buy…The Consumer Credit Act allows me to have a second transaction for the 40 footer and it gives me the opportunity to sell my 36 footer in a timely manner.’
‘Once I’ve got the right sale value I can take the equity from that and refinance the 40 footer with a much lower debt base. You don’t have to wait; if you’ve seen the right boat come along there are ways for you to do it.’
Finlease specialise in these type of transactions so if you let them know your requirements, they will search out the best boat loan for your particular circumstances from over 20 finance providers. Then it’s up to you whether you choose to go ahead with it or not. And the best news is that if you decide not to go ahead, there is no charge.
‘It’s about being flexible and thinking more about the debt; making sure that the structure is right for the client.’
In the coming months O’Donoghue will outline more popular boat finance products for anyone considering taking a loan for a pleasure, company or charter boat. In the meantime, Finlease has some excellent boat finance resources on their website, including calculators, spreadsheets, application forms and fact sheets.
See http://www.finlease.com.au or call 1800 358 658.
Riviera 4700 Sport Yacht