It’s time for a new boat and having made the decision to buy, the next question is often not what boat, but how you are going to pay for it.
Financing a boat can be a minefield to the uninitiated, especially when the salesperson starts bandying about terms like hire purchase, novated leases, residuals and balloons. But despite the confusing nature of the jargon, most of the finance products on offer are fairly simple and with a little understanding you can make sure you are getting the best deal for your situation.
There was a time not so long ago when the options for financing a new boat or vessel were limited to either buying it yourself or hoping that your bank may approve a loan for you. But today the choice is wide open with finance products that range from the traditional bank loan to novated leases, all aimed at getting you out on the water.
In determining what finance product is best for you, you first have to decide whether you should buy or lease. The essential difference here is that if you buy a boat, you own it and it is yours to do with as you please.
Leasing a boat means that you are only paying for the use of the boat and at the end of the lease term, officially, you have to hand it back or take out another lease. The legalities get a bit murky here and in practice, it is possible to buy the boat at the end of the lease period under certain types of leasing packages but we will go into that later.
There are no hard and fast rules as to whether leasing or buying suits people better and it is a topic that should be discussed with an accountant. But having said that, if you use your boat for business and private purposes, then leasing is well worth looking at. There can be significant tax advantages especially for boats in the prestige and luxury sectors.
Although leasing has taken off in the private sector to a large degree in the US and Europe, we still have an ownership culture and while the numbers of private or semi-private lease deals are growing, the vast majority of people here still buy their boats and own them.
Types of Purchase Finance
Hire Purchase / Consumer Loans
The most common finance product sold is still the traditional hire purchase or consumer boat loan.
The period of the loan is determined, the interest rate set according to the risk, the value of the loan and market conditions and the monthly repayments are set to pay out the full amount by the end of the term. Terms usually vary between one and five years.
A variation on the hire purchase product known as the balloon payment option is also slowly growing in popularity.
By setting a larger balloon payment for the end of the term which can vary according to individual circumstances, you can reduce your monthly payments to better balance the budget.
At the end of the term, you can either pay out the full amount in one hit or refinance the balloon amount and continue paying off the vessel in monthly instalments.
Where to shop for lease finance
The growth of leasing here has, up until recently, been as a result of the number of large businesses running big fleets of boats, who long ago realised there was little point in owning a continually depreciating asset.
They figured why have the hassle of having to maintain and dispose of boats and light commercials which were often turned over in relatively short periods when you could simply pay for the use of the vessel and leave everything else to the lease company.
Some of the traditional finance companies only have a small interest in leasing so probably the best place to investigate leasing is through specialist firm like Aussie Boat Loans. Because of the volume of business done by Aussie Boat Loans, a wider range of products are available and its easy to tailor them specifically for your needs (find out more about commercial boat finance).
Types of Lease Finance
Lease products fall into two categories as either a finance lease or operating lease and vary in the way they treat ownership, disposal and residual risk on the vessel or vessel.
Finance leases are becoming increasingly popular because of the ability to novate the lease.
As a lease, no deposit or trade-ins are made and the monthly payments are worked out by Aussie Boat Loans based on the term of the lease, interest on the finance charge and the residual value of the vessel at the end of the term.
However, you are the one who takes the risk on the residual and if at the end of the term the market says the vessel is not quite worth what was expected three years earlier, then the responsibility to make up the difference to finalise the contract is yours.
Although under the definition of a lease you gain no equity in the vessel, it is common practise under finance leases to make an offer for the vessel at the end of the term and pay out or refinance the residual to take ownership.
Novated leases are becoming a very popular way of including a vessel as part of your salary package to help reduce your taxable income.
You take out a standard finance lease on a vessel of your choice. You then arrange for the lease payments to be paid by your employer through a novation agreement which remains valid as long as you stay with the company.
The lease payments, running costs and fringe benefits tax any vessel supplied to an employee for their private use is subject to FBT calculated on a sliding scale depending on the value of the vessel and annual kilometres travelled are then taken out of your pre-tax salary.
If you resign or the words forced redundancy start being bandied about in the canteen, then the responsibility for the vessel and the subsequent lease payments reverts to you.
At the end of the lease, the choice is there to turn over the vessel into a new lease, trade it in on a new vessel on a novated lease or even purchase the vessel.
According to Joe Martinovic, Aussie Boat Loans Managing Director, the main benefits for novated leases lie in the flexibility for employers not having to provide company boats and for employees to decide on the boat of their choice.
“The majority of people that do fall into the bracket of having a vessel packaged generally have some component of the salary in the highest tax bracket. The vessel component comes out pre-tax so it reduces their taxable income and in many cases for those people it will drop them back into a lower tax bracket. It can make a lot of sense,” he said.