The wealthy are buying yachts and jets in record numbers, and they're doing it without having to put much cash down. Here is how it works. (2024)

"It's been quite a ride," Verbit told Insider. "We've worked with a number of clients in the past year-and-a-half who had to move faster than they normally would because sellers had backup buyers, and if they didn't move quickly, they would lose their chance to get the yacht."

Borrowing against yachts or jets at the point of purchase — or shortly after — means customers can put up little to no cash to close the deals.Depending on the desirability of the asset, banks extend loans from half to nearly 100% of its value. Borrowers can either draw on another line of credit, pledge more collateral, or use cash to cover the rest of the purchase.

For rich individuals whose assets are tied up in stock, real estate, and other assets subject to capital gains taxes,the move is a no-brainer. In California, for instance, capital gains taxes can total nearly 40%, whereas interest rates are near historic lows.

None of the bankers interviewed for this story would specify their firms' typical interest rate for these types of loans. But one executive, who spoke anonymously so they could speak freely, said that the interest rate for a loan against a top-tier business jet for a client in good standing with a liquid balance sheet could be as cheap as SOFR plus 135 basis points. SOFR, a benchmark interest rate, has been 0.05%since the beginning of 2022.

Another benefit of lending against yachts and jets is that clients can still enjoy them during the loan.And for bankers,it's a way to start relationships with new high-net-worth customers and keep current clients happy.

At Bank of America, 80% of its yacht-backed loans are for existing private bank clients, according to Verbit. Newer clients have to take bigger loans. Only existing customers can take loans as small as $1 million, but watercraft loans are usually around $10 million.

These types of loans do come with strings attached. Banks keep a watchful eye on their collateral and stipulate how often these assets are maintained and where they are kept.

"You never want to start a relationship thinking it's going to end with divorce," Glenda Pedroso, Northern Trust's banking practice leader, told Insider. "But having the right prenup can assure a smoother exit."

Loan terms are much better with jets than yachts

Before the bank signs off on the loan, the aircraft or watercraft has to be appraised by a firm approved by the bank. The loan size is a percentage ofthe purchase price or the appraised value, whichever is lower.

Though the watercraft market is hot, it is still difficult to offload superyachts. Banks take this into consideration when extending loans.

At JPMorgan's private bank, the loan-to-value (LTV) ratio for yachts is typically 50%, according to Vince La Padula. In his experience, it takes a year to 14 months to sell a yacht, whereas jets are an easier sell. The LTV ratio for an aircraft is usually 90%, and he extends about 30 aircraft loans a year versus four to five for yachts.

"We are more comfortable if we ever had to foreclose on a plane," the head of lending solutions at JPMorgan told Insider. "There's a lot of potential buyers and it's a pretty liquid market."

LTV ratios vary per banks. At Northern Trust, the LTV ratio for aircraft-backed loans ranges from 65% to 80%, though 90% isn't unusual. For Bank of America's yacht-financing practice, the average LTV is 70% to 75%.

Boats and planes have to be appraised to a bank's satisfaction

It typically takes four to six weeks from underwriting to closing the purchase, depending on the complexity of the client's balance sheet and how the appraisal goes. Some issues — such as missing fire extinguishers or a blister on the hull — need to be fixed before closing unless the insurance company gives a grace period to fix it.

The age of the asset is paramount, and banks do evaluate maintenance records and flight histories. Even if the client is renewing a loan — most clients take loans for five to seven years — the asset has to be appraised again.

For clients that can't afford to wait due to competition from other buyers, the bank can extend a line of credit — if the client doesn't already have one — and then use the asset as collateral after the purchase is completed.

The loan terms often stipulate a regular maintenance schedule and give the bank the right to have the asset appraised at any time. If there is a collateral shortfall — the value of the asset falls below the value used to calculatethe loan — the borrower has to pledge additional assets or pay back enough of the loan to correct the difference.

Though these loans have a low default rate, these executives told Insider, bankers do put in clauses to protect themselves in the event of a foreclosure.

La Padula often requires that the bank can charter the yacht as those customers make for likely buyers in the event the borrower is unable to pay.

The goal of these loans is to land new clients and keep existing ones happy

To be sure, while yacht and jet loans are a way to drum up new business, they aren't a goal in and of themselves.

Pedroso of Northern Trust said that extending yacht loans, which usually range from $7.5 million to $15 million, has been an effective business development strategy, but she often advises clients to consider the cost of upkeep. Even if the borrower can afford to pay back the purchase, the maintenance can be steep.

With yachts, the industry knowledge is that the yearly maintenance, including crew insurance and docking fees, costs 10% of the sticker price.

"There's an old adage that a boat is a hole in the water where you pour money," Pedroso said. "There's a lot of sticker shock with maintenance when it comes to aircraft and yachts, and getting a million-dollar bill for maintenance is not unheard of."