What do boat finance lenders look for?

Your broker may also advise that it pays not to put all your eggs in one basket by having your loans with the one bank or finance company
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8th Oct 2008

When considering that next boat purchase, or even if you’re a first time buyer, chances are choosing the right finance solution is not high on your list of priorities. Yet it should be, as there are many more finance opportunities available than you may have thought. What’s more, choosing the right finance package can potentially make a pleasure boat more pleasurable, or can help a commercial vessel a better business proposition.

So, consider the level of effort you are making in choosing the right engine, hull design, boat manufacturer and equipment levels. It’s exactly the same when it comes to selecting the right finance package. But you won’t find a raft of options by simply popping down to your friendly bank manager or using the boat dealer’s finance company. Having a good finance broker on your side can be an invaluable tool. We talked to one which is a specialist in areas including boat finance, and what they were able to tell us came as something of a revelation.

It’s a good idea to have your finance in place early in the process. This will give you considerable leverage and can enable you to take up that ‘once in a lifetime opportunity’ should the perfect boat come along at a bargain price. So here are a few aspects you may need to take into account when you start looking for the right finance solution.

A broker experienced in boat finance will be able to explain what’s available to you in plain English. You need to look for a specialist broker, rather than a general finance provider who doesn’t fully understand the unique dynamics of boat finance. Look for a broker with a long track record for financing boats including runabouts, luxury motor cruisers and even charter boats. Since many craft generally have substantially better long term resale values than cars, there are some handy pointers you should keep in mind.

Don’t tie up your boat
It’s a good idea not to limit your options by securing your boat loan against real estate. If you are using your existing bank, chances are the bank will want to ‘cross collateralise’ the loan against your home or other assets. When you deal with a specialist boat finance finance broker, in 99% of instances the boat should stand as its own security.

Your broker may also advise that it pays not to put all your eggs in one basket by having your loans with the one bank or finance company. So if you have your home loan with one lender, think about going with someone else for your boat, another for your car, and so on.

Increase your bargaining power
Before you go out and start shopping for a boat, it’s worth obtaining a pre-approval for your loan. This puts you in a better bargaining position when you eventually find the perfect boat that you don’t want to let slip through your fingers.

If you’re contemplating a boat purchase, we would suggest first talking to your brokers and putting in place a loan for a ‘hypothetical’ boat. Once it is approved, you can confidentially negotiate on a boat knowing that the finance is ready to go.

Look for a specialist finance broker who can search out the best boat loan for your particular circumstances from a wide range of finance providers in order to secure the best rates and terms. This should be a completely obligation free service, so if you eventually decide not to take up the finance, there is no charge.

Stormy waters overseas
With the recent turbulence in world financial markets brought about by the US sub prime home loan crisis, banks here are becoming more stringent in their lending criteria. That’s another reason why having a good finance broker who understands the current situation can help.

A broker experienced in boat finance will have experts who know how to handle your application and present your case to an appropriate lender under the current lending criteria. Finlease moved into the boat finance business in the early 1990s and it’s now about 15% of their annual turnover. Even though you’re employing the services of a professional, it will probably actually save you in the long run.  

Think before you cast off
Before you decide on funding, however, ask yourself some questions. How long you are likely to keep the boat? Will it be purely a pleasure boat, or could there be some business use? When it comes to evaluating one finance proposal over another, your broker should make you aware of obligations like your minimum commitments, the loan’s security and any special conditions which apply. Just like deciding between petrol or diesel, power or sail, there can be many considerations, both short term and long term, when it comes to evaluating a finance solution.

Look below the surface

Always check the payments to ensure that you are getting the interest rate you think you are. Compare the repayments with a calculator on marine websites like those on boatpoint.com.au or yachtpoint.com.au.
Then in looking over the loan, be sure to read all the fine print. Often boat finance contracts are entered with the borrower having little or no appreciation of the long term commitments that they entail. Before signing on the dotted line, ask yourself “Do I understand the structure of this loan and my repayment commitments? Are there any early termination costs? What is the interest rate and is the loan secured by just the boat?

Charter boat considerations

Perhaps you’re looking at the idea of buying a yacht for a charter situation which you may also have access to for occasional private use.

Finlease can advise on how the ATO may view your purchase. Laws have changed as recently as July 2007, so it’s worth finding out the current situation including negative gearing aspects. So ask your broker if they are aware of the changes to legislation over the years and can advise on the current status quo. Mark O’Donoghue of Finlease was one of the driving forces behind the Charter Boat Industry Survival Campaign in 2002 and is an acknowledged expert.

Maintain flexibility
Always make sure the loan structure is right for you. Today there are so many flexible choices such as:-
•    Up to 100% finance without tying up real estate on new or used boats. This also includes private sales over terms of up to 5 years with a balloon or residual of up to 40% which can be rewritten over a subsequent term, all with minimal early termination costs.
•    Two-stage debts are an option if you’re considering buying a boat before having sold your existing one. In such a situation, you may anticipate that it could take a few months to sell at the right price, but you don’t want to miss out on a particularly attractive opportunity when it comes along. Fortunately the solution could be to secure 100% finance for the new one. Then once you have sold your existing boat, pay out the loan and refinance for the lower amount using the proceeds from the sale. The minimal early termination costs (less than $750) on these boat loans provide wonderful flexibility.

WHAT DO LENDERS LOOK FOR?...

As a quick boat buyers checklist, here’s what lenders will be looking for when approving your loan:

1.    Your capacity to meet the repayments based on your income.
2.    For 100% finance you need to prove that you have ‘tangible’ net worth, i.e. equity in property or investments. Our financiers do not want a mortgage, but will simply want to feel comfortable that your have the ability to make good any shortfall between the second hand value of the boat and the amount owed.
3.    A good credit history
4.    Stable employment and income

Article supplied by Harbourside Media.

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