Caveat Loans vs Second Mortgages: What Is the Difference?

Borrowers often ask for "a caveat loan" when what they want is simply money quickly against property they already own. Caveat loans and second mortgages both do that, and both rank behind an existing first mortgage. The practical differences come down to registration, speed, term and price.

What each one actually is

A second mortgage is a registered mortgage, recorded on the certificate of title behind the first. It gives the lender a clear, enforceable security interest and — importantly — it normally requires the first mortgagee to consent.

A caveat is a notice lodged on title recording that someone claims an interest in the property. It does not create a mortgage. Its practical effect is that it blocks further dealings, so the property cannot be sold or refinanced without addressing the caveat holder. That makes it a workable short-term security when a registered second mortgage is not available or not fast enough.

Speed and process

A caveat can usually be lodged in days, because there is no consent to negotiate. A second mortgage takes a little longer, largely because of the consent step and the mortgage documents themselves. If your deadline is a week away and your first lender is slow to respond, that difference decides the structure.

Term and cost

Caveat funding is genuinely short-term money, typically one to six months, priced accordingly. A registered second mortgage supports longer terms and generally prices better, because the lender holds a stronger position. Our second mortgages run from 12 per cent per annum, to 80 per cent LVR, from $50,000 to $1m. Caveat pricing depends on the loan size, the equity behind it and the exit.

Which one suits which situation

• Settlement shortfall two weeks out — caveat, because time is the binding constraint.
• Six to twelve months of working capital — second mortgage, for the lower rate and the longer runway.
• First lender will not consent — caveat, or a full refinance of both loans.
• Property already listed for sale — either works; the sale is the exit and the security is discharged at settlement.

What lenders assess either way

The analysis is the same in both cases: the value of the property, the balance of the first mortgage, the resulting total LVR, and the credibility of the exit. Asset-first underwriting does not mean no underwriting. Expect to provide a rates notice, a title search, a current first mortgage statement, and a short written explanation of what the money is for and where the repayment comes from.

Risks to weigh before you sign

Short-term secured funding is powerful and unforgiving. Three things to check:

• Term length. If your exit is realistically eight weeks away, do not sign a four-week facility. Build in buffer.
• Default interest. Know the rate that applies if the term expires before your exit lands.
• Total cost. Establishment, legals, lodgement and any exit fee, disclosed in writing before settlement.

Also confirm there is no early repayment charge. If your sale settles a month early, you should stop paying interest a month early.

The honest summary

A caveat is a speed instrument. A second mortgage is a structure instrument. Most borrowers who think they need a caveat loan are better served by a registered second mortgage if the calendar allows it — and if it does not, a caveat done properly, with a defined exit and a realistic term, is a legitimate tool.

Send us the property value, the first mortgage balance, the amount and your deadline. We will tell you which structure fits and what it costs.