Caveat loans vs second mortgages

When a borrower needs money quickly and already has a first mortgage, two short-term options come up: a caveat loan and a registered second mortgage. They are often discussed as if they were the same thing. They aren't. The difference is in what the lender actually holds, and that difference flows through to speed, cost and what happens if something goes wrong.

What a caveat is

A caveat is a notice lodged on the title register under each state's land titles legislation. It warns anyone dealing with the property that someone claims an interest in it, and it generally stops later dealings - a sale or a new mortgage - from being registered until the caveat is dealt with. A caveat doesn't create an interest on its own. The person lodging it has to have one to protect, such as a charge over the property given in a loan agreement.

What a caveat loan is

A caveat loan is a short-term loan where the lender takes that kind of charge and protects it with a caveat, instead of registering a mortgage. Because nothing has to be registered beyond the caveat, and there is often no approach to the first mortgagee, caveat loans can be arranged very quickly - sometimes within days. They tend to be smaller, shorter and priced well above a registered loan.

What a registered second mortgage is

A second mortgage is a mortgage registered on the title behind the existing first. The second lender holds a legal interest in the property, with the rights that registration brings. Most first mortgages require the first lender's consent to further security, and a deed of priority usually records the order in which the two lenders are repaid. That consent step takes time - often the longest part of the file - but it leaves everyone's position clear.

What caveat loans are used for

Caveat loans are usually short-term fixes for a cash need measured in days: a supplier who has to be paid this week, a tax payment due before a sale settles, a deposit on a purchase that can't wait for a longer approval. The property owner already has a first mortgage, and the caveat lender provides a small amount against the remaining equity, expecting to be repaid from a known event soon afterwards. When that event is close and certain, the higher price can be worth it. When it is uncertain, the short term and the enforcement risk work against the borrower as much as the lender.

Why caveat loans cost more

Price follows risk, and a caveat lender carries more of it. Its security is weaker than a registered mortgage, recovering the money after a default usually means going to court, and the caveat itself can be challenged. In most states the owner can apply to have a caveat lapse. In New South Wales, for example, the Registrar General can serve a lapsing notice, and the caveat lapses unless the caveator obtains a Supreme Court order within 21 days. A lender facing those risks prices them in, usually through a higher rate and heavier fees over a short term.

The risk borrowers miss

Most first mortgages restrict further dealings with the property without the first lender's consent, and some treat a caveat lodged without consent as a breach. A caveat loan arranged to avoid talking to the first lender can therefore put the first mortgage itself at risk - a far more expensive problem than the one the caveat loan was meant to solve. Read the first mortgage before choosing the route, not after.

A caveat loan buys speed. A registered second mortgage buys certainty. On most files with a few weeks to spare, certainty is cheaper.

When a registered second mortgage is the better route

• There are at least a couple of weeks before the money is needed, enough time for consent
• The amount is larger than a caveat lender will comfortably write
• The borrower needs the money for months, not weeks
• The first mortgage is worth keeping, and its terms restrict further dealings
• The exit is a refinance or sale that may take longer than planned

Where Alphacon sits

Alphacon doesn't write caveat loans. Alphacon Second is a registered second mortgage of $100,000 to $5,000,000 behind an existing first, to 70% combined LVR, over 6 to 60 months, from 9.95% p.a. We start the first mortgagee's consent the day a deal is submitted, because that is the step that sets the settlement date.

Caveat loans have a place when time is measured in days. For most borrowers with a first mortgage worth keeping and a few weeks to work with, a registered second mortgage is the steadier and cheaper way to release the same equity.