The definitive guide to yacht financing
Yacht financing is a popular way to realise the ultimate lifestyle purchase of buying a luxury yacht. Yacht financing offers numerous benefits, making it a popular option when acquiring a boat.
Financing a yacht is a specialised and complex area. Sam Cook from JP Morgan Private Bank weighs in on some of the most frequently asked boat financing questions.
Yacht financing
What are some of the most popular ways to finance a yacht?
“When purchasing a yacht, there are a variety of ways to fund that purchase. The preferred option may be where a buyer has access to liquidity, either in cash or through the sale of financial assets. However, there is an opportunity cost to do so, either by foregoing a potential return on those investments or limiting flexibility in the future where an unexpected need for liquidity arises. For this reason, many buyers will consider financing their yacht purchase using one of two yacht financing solutions: by borrowing against their financial investments or implementing long-term yacht financing.
“Borrowing against liquid financial investments can be a very efficient tool when buyers require funds in a short period as well as providing the lowest cost boat financing solution. On the other hand, this may create a mismatch between the asset and liability, potentially inserting margin call or currency risk and limiting the buyer’s future flexibility to use this source of liquidity in the future.
“Yacht financing can be an attractive proposition for many buyers, providing access to long-term committed financing, which is aligned to the typical ownership cycle of the yacht. This form of financing will likely attract a higher interest rate but ensures prudent asset and liability management, helping ensure that any margin call or currency risk is reduced.
“By understanding the objectives of the client as well as the client’s balance sheet and cash flow position, a private bank, such as JP Morgan Private Bank, can advise on the optimal solution for each client.”
What are some essential considerations to yacht financing?
“A bank and a buyer may frequently consider the same questions when undertaking a yacht purchase. For example:
- Which shipyard built/is building the yacht?
- How old is the yacht?
- What type of yacht is it (motor, sailing, explorer, etc.)?
- Is the yacht in good technical and cosmetic condition?
- Who will manage the yacht?
- Which registration jurisdiction will the yacht be registered in?
“Each of these considerations can impact the availability of yacht financing or the potential financing terms. So, it is best for buyers considering yacht financing to engage their bank as early as possible as they consider each of these elements of the purchase process.”
What are some pitfalls to look out for when financing a yacht?
“One of the most frequent issues we face relates to timing. Implementing yacht financing is a more complex and time-consuming process relative to other financing options. Therefore, it is essential to plan ahead to ensure that the financing can be implemented in a timely manner.
“In addition, one of the key risks that borrowers should be aware of is margin call risk. During the term of yacht financing, the bank will undertake periodic valuations of the yacht, typically on an annual basis, which may indicate an unexpected reduction in the yacht’s value requiring an unexpected partial early repayment or additional collateral to support the facility. However, this risk can be effectively managed with a more prudent loan structure, including increased periodic amortisation payments.”
What are the benefits of yacht financing?
“Yacht financing can be an efficient tool when considering a purchase for many reasons, including:
- Access to liquidity for the purchase of a new or larger yacht.
- Extract liquidity from an illiquid and depreciating asset to earn an investment return or income. This can be used to fund the ongoing maintenance and running costs or simply to grow the buyer’s overall balance sheet.
- The ability to implement a long-term, committed financing aligned to the typical ownership cycle of the asset, thereby providing certainty and maintaining flexibility to use other assets in the future for more tactical opportunities.
“Additionally, one of the indirect benefits that many buyers appreciate is the diligent approach that a bank will take with respect to the yacht’s construction, condition, maintenance, and operation, ensuring that the owner’s interests are protected. Ultimately, it is ideal that the bank and the buyer’s interests are aligned in ensuring the yacht retains its value as much as possible.”
What documents will I need to secure boat financing?
“Once the principal terms of the financing are agreed, usually in the form of an agreed Term Sheet, the next step is to agree the final form loan documents, including:
- The credit facility agreement, the primary document setting out the terms of the yacht financing and the requirements relating to the yacht’s maintenance and operation, insurance, covenants etc.,
- The loan security documents, including the yacht mortgage, share charge over the owning entity, manager’s undertakings provided by the yacht’s manager, and other ancillary security customary for this form of financing. As part of this process, it is customary for the bank and the buyer to appoint specialist yacht counsel with expertise in yacht financing to ensure an efficient process to review and agree the final documentation. This would typically take about 4-5 weeks for this stage of the boat financing.”
What ancillary expenses need to be factored in when financing a yacht?
“Additional costs associated with the financing can be grouped in to two buckets:
1 – The upfront and ongoing costs associated with the valuation process
2 – The legal costs associated with the drafting and negotiation of the loan documentation in respect of both the banks legal costs, as well as any costs of appointing their own counsel, which we would usually advise a client to do given the unique legal considerations of yacht financing.”
Will I need to have any marine surveys to finance a yacht?
“It is customary for a bank to obtain a valuation of the yacht to determine the applicable loan amount for the yacht financing. The valuation process will usually involve a physical inspection of the yacht by a reputable independent surveyor, typically lasting 2-3 days depending on the size of the yacht, to determine the technical condition, a key factor in determining the market value.
“If yacht financing is being considered at the time of the purchase of the yacht, the bank’s valuation can usually be arranged at the same time as the buyer’s pre-purchase inspection process, potentially by the same appraiser.
“In addition to the initial valuation of the yacht, an updated valuation will be obtained on an annual basis on either a desktop basis or including a physical inspection. Usually, a physical inspection will only be required every 2-3 years.
Will the yacht have to be registered in my country of residence to secure yacht financing?
“No, in fact, it is not very common to do so. There are several considerations in selecting the optimal registration jurisdiction for each buyer, and the buyer should obtain specialist legal and tax advice to determine the appropriate registration jurisdiction.
“One of the most important issues from a bank’s perspective is that it is possible to obtain a mortgage over the yacht in a well-known and competent jurisdiction. Typically, this will include the Red Ensign Group, Malta, or the Marshall Islands, all preferred jurisdictions for many owners.”
Are there any other options other than yacht financing?
“For many buyers, yacht financing is not a necessity. Instead, it is seen as an efficient balance sheet management tool. Given it is not a necessity, there are usually several alternatives to funding the purchase of a yacht and alternative means to funding the ongoing operations.
“In respect of funding a purchase, as highlighted above, there are a variety of options available to a buyer from purchasing with cash or selling liquid financial assets to borrowing against other assets. A buyer should consider these various options on a case-by-case basis weighing their goals and objectives over the short, medium, and long term.
“Additionally, to offset part of the costs of ownership, some owners will allow their yacht to be chartered. This can prove to be an attractive proposition by generating income and having the advantage of the yacht becoming ‘known’ to potential future buyers.”
How can a yacht broker help me finance a yacht?
“Yacht financing can take several weeks to implement, so it is always best to plan in advance to ensure the loan is available at the intended closing date. Identifying and planning upfront with your yacht broker whether financing may be required/preferred will help ensure that the preferred bank is identified as soon as possible, in some cases before identifying the yacht.”
