Caveat loans are an increasingly common form of short-term finance in Australia. ‘Caveat’ is a legal term. All loans contain legal terms and conditions, so that’s nothing unusual.
Read on to find out everything you need to know about how caveat loans work, including:
- the steps involved in getting one.
- common myths.
- answers to FAQs.
The steps involved in getting a caveat loan
At DFS, we make the process of getting a caveat loan as simple as possible. Below are the 6 steps we take each of our clients through.
Step 1 – Financial needs analysis
When a client contacts us, we have a discussion to get a thorough understanding of their financial needs and goals. In other words, where they currently are, where they want to go and how much they need to borrow to get there. Our caveat loans can be used for any business purpose.
Because caveat loans use property as security, we find out two important things during Step 1.
1) Details of any properties the client owns (or that any family, business partners or friends own) that could be used as security.
2) How much the client currently owes on their mortgage (if anything is owing).
The more ownership (equity) the client has in their home, the higher their borrowing power (and vice versa).
Step 2 – Our finance recommendation
We advise our client of the most suitable type of finance for their financial situation and needs, based on the information provided in Step 1.
If the home is unencumbered (i.e. the client owns it outright and has no mortgage), we can lend against it with a first mortgage.
However, if there already is a first mortgage on the home, we can lend against it with a second mortgage or caveat.
Either way, we will do a valuation on the home to find out its current market value. You might be pleasantly surprised by what your home is worth, especially if you’ve had it for a few years. One of the major benefits of owning property in Australia is that it has a long-term growth trend. Historically, prices have tended to double in value every seven to ten years, especially in major capital cities.
Property price growth has even been strong after a minor slump during 2020 due to the economic impact of COVID-19. All of the government incentives to stimulate the building sector of the economy like the HomeBuilder Scheme, the First Home Loan Deposit Scheme and First Home Owner Grants have combined to see property prices rebound strongly.
Step 3 – Working out the loan amount, repayment schedule and exit strategy
We let our client know how much they can potentially borrow based on our estimate of the market value of the property that will be used as security. At DFS, we can arrange loans for up to 100% LVR via our network of private lenders. This means that if your property is worth $1.5 million (for example), you can borrow up to $1.5 million.
We also discuss repayment options and help our clients to develop an ‘exit strategy’ for the amount they want to borrow. In other words, how they will pay off their loan at the end of the term.
Our clients have the option of paying interest monthly or capitalising it (adding it to the loan balance instead of paying it monthly).
Once we have determined the loan amount, repayment schedule and exit strategy, we issue our client with a letter of offer. This letter of offer will specify all of the details of the loan to be arranged by DFS, but it isn’t a formal approval.
Step 4 – Loan application paperwork, property valuation and the formal loan offer
Our client then fills out their loan application paperwork and provides us with appropriate documentation. They also pay a valuation fee to enable us to get a formal valuation done on their property. After the formal valuation is done, a formal loan offer is then issued for acceptance and signing.
Step 5 – Preparation, independent checking, and signing of legal loan documents
Once the formal loan offer is accepted and signed by our client, it is sent to our specialist mortgage lawyer to be legally drawn up. These documents will also be sent to the client’s lawyer. We are fully transparent. We encourage our clients to have their loan documents independently checked prior to signing their formal loan contract.
Step 6 – Transfer of loan funds
After the formal loan contract is signed, we immediately arrange the transfer of funds to either our client’s business bank account or to their lawyer’s trust account. That decision is up to the client. If the funds go via the client’s lawyer, the lawyer then forwards them based on the client’s instructions.
A caveat is also placed on the property that has been provided as security via the relevant land title office where the property is located. In New South Wales, it’s via Land Registry Services. As mentioned earlier, when the loan has been fully repaid, the caveat is removed.
If you have any more questions about caveat loans, contact us at DFS or check out our complete guide here.
The top 3 caveat loan myths
There are plenty of myths about caveat loans. Here are the top 3 that can be ‘busted’ with cold, hard facts.
Myth 1: A caveat will prevent you from ever selling your property
Fact: The caveat will be removed as soon as you repay your caveat loan. A caveat loan simply requires you to put up property as security. A caveat is then put in place so that you can’t sell your property until you repay your loan. Once you’ve repaid the loan, you are free to sell your property. As caveat loans are typically for short-term finance, the restriction on selling your home won’t be in place for long.
Myth 2: Your caveat lender can sell your property if you don’t make your loan repayments
Fact: If you think a caveat loan sounds like a normal mortgage, you’re half right. Both require property as security. But if you fall behind in your caveat loan repayments, a lender can’t repossess and sell your property. They can with a mortgage loan. That’s a huge benefit of caveat loans.
Myth 3: They are difficult to get
Fact: It depends on where you try and get one. If you apply through a bank, you certainly might be frustrated because they prefer mortgage loans.
If you apply with a private lender, on the other hand, caveat loans are easy to get if you have equity in property. We are private lending specialists at DFS.
Caveat loan FAQs
Here are answers to the most common questions we get about caveat loans from our DFS clients.
What are the accepted properties for a caveat loan?
Acceptable properties to use as caveat loan security include Australian residential, commercial or industrial property.
Do caveat loans settle faster than second mortgages?
Yes. Second mortgage lenders have stricter approval criteria because the holder of the first mortgage can sell the property if the borrower doesn’t make loan repayments. First mortgage holders therefore have a higher priority than second mortgage holders.
Property that’s used as security for a caveat loan can’t be used as security for any other finance. It’s therefore not only less risky for the borrower, but for the lender too. That’s why a caveat loan will be approved faster.
Can you refinance with a caveat loan?
Yes, you can. For example, to consolidate all your high-interest debts into a single, lower-interest caveat loan to save money and make your repayments easier to manage.
Are bad credit caveat loans possible?
Yes, because the property provides the lender with security.
How fast can I get a business caveat loan?
That depends on who you apply with. If you apply to a traditional lender like a bank, you won’t get approval or your funds quickly. It can take weeks.
If you borrow through a private lender, on the other hand, you’re much more likely to get your caveat loan application approved and your funds in your account faster. At DFS, we arrange financial approval and transfer for our clients in as little as 24 hours.
How much can I borrow with a caveat loan?
The maximum amount you can borrow with a caveat loan depends on three main factors.
- The value of the property you put up as the caveat.
- Your ability to afford loan repayments.
- The maximum loan-to-value ratio (LVR) that your lender is prepared to accept.
What is the caveat loan LVR?
A caveat loan LVR is calculated by dividing the amount you want to borrow by the value of the property you’re putting up as security. For example, if you have a property worth $1,000,000 and you want to borrow $900,000, your LVR would be 90%. This is calculated by dividing $900,000 by $1,000,000.
Different lenders will be prepared to accept different maximum LVRs, usually ranging from 80% to 100%.
