Philip Bartholomew from Seacoast Marine Finance dives right into boat financing, and help you navigate through the plethora of options.
While the pool of conventional marine lenders has narrowed since 2007, there are still banks that continue to offer boat loans and yacht loans. Some are large, national or multi-national banks, others are small-to-mid-sized local or regional players. Many use third party finance brokers to sell and set up their loans to borrowers meeting the bank’s criteria. Other banks, as well as some investment brokerages, cater only to their existing customers, either securing the loan with the boat or permitting them to leverage other assets (land, securities, investment account balances to name a few) in order to borrow money for a boat. I happen to think it makes much better sense to secure the loan with the boat rather than encumbering other assets, but that’s another post.
Here, I’ll focus on the general types of marine loans, $75,000 and up, which are offered by banks, secured by the vessel, and available to the qualifying consumer. Loan conditions, interest rates and costs vary by loan size and lender, so you will ultimately be better-served by speaking to a specialist with a broad knowledge of what is available in the marketplace.
As discussed in my last post Who qualifies for a yacht loan in this economy?, 70-80% of a vessel’s purchase price may be financed for up to 20 years and, in rare cases, higher. Above $5,000,000 or so, terms range from 7 to 15 years.
Generally speaking, you’ll find four types of loans: fixed rate, variable rate, hybrid, and interest-only.
Fixed rate loans:
The interest rate remains fixed throughout the term. The amortized principal payment plus the interest remains the same and the payment will not fluctuate for the life of the loan. This type is more appropriate for the consumer anticipating longer-term boat ownership (4 to 5 plus years) and willing to accept a moderately higher interest rate in return for the comfort that their payments will not increase should rates go up.
Variable rate loans:
the Adjustable Rate Mortgage (ARM): the interest rate is based upon certain floating indexes and will change with the rise/fall of the index. A bank margin is added to the indexed rate to calculate the effective rate of the loan. A current example is a Prime rate loan at 3.25%, plus a 250 basis point (2.50%) margin, which equals an effective rate of 5.75%. The margin typically does not fluctuate, but the index can. For instance, should the Prime rise to 4.00%, the effective rate becomes 6.50%.
Indexes commonly used in yacht financing are the LIBOR and the Prime rate. Current index rates can be viewed on websites like BankRate(dot)com
Variable rate loans are often taken by borrowers with shorter-term ownership plans and those willing to realize significantly lower interest rates in return for incurring additional risk that their payments could fluctuate.
- A fixed rate loan and an ARM: a fixed interest rate for a certain period, usually three to five years, then converting after that period to a variable interest rate plus margin for the remainder of the term. Because of the shorter fixed term, the initial interest rate is often a quarter-to-a-half per cent lower than longer term fixed rate loans. Hybrids are popular with buyers having a specific length-of-ownership in mind and/or those looking to enjoy the lower interest rate for the short term and open to refinancing (if necessary) further down the road.
- Interest-only loans: as the name implies, only interest is paid during the term of the loan and the principal is repaid at the conclusion of the term. Interest may be calculated using either fixed or variable interest rates. Most banks offering the interest-only option require a higher down payment (generally 30-40% down) and extend terms of 3-7 years before repayment of principal (a “balloon”). Some banks will permit an interest-only loan to convert to a principal-and-interest loan at a prearranged time.
As you might imagine, interest-only loans are used by borrowers who want the lowest monthly repayment possible and, because of their compensation schedule (perhaps quarterly distributions or annual bonuses) and/or the planned sale of the boat, expect to pay down or pay off the principal in the allotted time.
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