Finding the right funding solution for a short term loan can feel complicated, with many people presuming that second mortgages are the same as caveat loans — when in fact, they’re not!
Amongst the number of different loan products available to both individuals and businesses out there, caveat loans are a strong contender.
Keep reading to understand the difference between caveat loans and second mortgages, and why you should consider using a caveat loan to finance your next venture.
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- What is a caveat loan?
- How is a second mortgage different to a caveat loan?
- The similarities between caveat loans and second mortgages
- The differences between short term caveat loans and second mortgages
- The benefits of using short term caveat loans
- Caveat loans settle faster than most other types of finance
- No need to undergo a credit check
- Used for more than just a business purpose
- Simplified application process
- Access a caveat loan even with an existing mortgage
- What can I use a short term caveat loan for?
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What is a caveat loan?
A caveat loan is a short term lending solution created when you use an existing property to secure a loan.
A legal caveat is placed on the title deed of an existing property to indicate that the lender has a registered financial interest in the property, and shows that the property has been used as security for a loan.
The way that the legal caveat works is similar to a sanction or injunction; it presents a formal notice that prevents any other dealings on the security property until you’ve repaid the loan and it is settled in full.
This means that while the caveat is active on a real estate property, it restricts a property sale without the permission of your caveat loan lender. It also means that any third party that tries to register any sort of dealing on the property won’t be able to, and your caveat loan provider will be notified.
How is a second mortgage different to a caveat loan?
Second mortgages and caveat loans are quite similar. However, there are a few features that distinguish them from one another.
A second mortgage is quite literally as it sounds — it’s a mortgage taken out on a property to access funds in addition to the previous mortgage.
In the past, home mortgages were long term loans that spanned between 20-30 years and were mostly provided by banks and large institutional lenders.
Second mortgages are different from first mortgages though, as a first mortgage is designed to finance the purchase of the home or its construction, whereas a second mortgage can be used to fund a range of finance needs over a much shorter term.
The similarities between caveat loans and second mortgages
There are quite a few similarities between a caveat loan and a second mortgage, so it’s understandable why so many people get the two confused with one another.
Some of the similarities include:
- Both second mortgages and caveat loans are short term business loans that are also available to individual borrowers.
- They both use an existing property as security against further lending and are both created when a lender’s interest in a property is registered.
- You can use a second mortgage or a caveat loan for similar purposes such as cash flow injections, property development and bridging the gap between property sale and purchase.
- Private funding is available for both loan types.
The differences between short term caveat loans and second mortgages
Caveat loans work differently from second mortgages in a couple of ways. The fundamental difference is really in how they are secured as well as the lending criteria and loan terms.
- The loan terms between second mortgages and caveat loans can differ. While both are short term loans, caveat loans often have a much shorter loan term — typically around 12 – 36 months.
- Many people ask us, “how are caveat loans secured?“. A caveat loan doesn’t technically release equity in your property, it simply places a legal caveat over your title deed. In addition, the caveat loan lender cannot sell the property in the event of foreclosure, whereas a second mortgage may be able to request such action.
- Importantly, it’s good to know that because the caveat is a form of encumberment on the title of the property that sits behind any mortgage, consent from your bank to have a second mortgage attached isn’t required.
- The loan amounts with caveat lending tend to be higher than what’s available with a second mortgage. The loan-to-value ratio on a caveat loan can be as high as 80% of the property value, meaning that you can borrow up to 80% equity in your property, whereas it’s usually capped at 75% with a second mortgage.
- The lending criteria for a second mortgage can be much stricter than a caveat loan, because the lender of the first mortgage holds priority to recouping lost funds in the event of defaulting on the loan amount.
- It’s good to know that once you have repaid your caveat loan in full, the caveat is removed quickly and easily with minimal paperwork. This isn’t always the case with second mortgages.
The benefits of using short term caveat loans
Caveat loans in Australia are becoming a popular finance method for business owners and individuals alike, due to their efficiency and flexibility.
There are many major benefits of short term caveat loans, here are just some of them:
Caveat loans settle faster than most other types of finance
With minimal documentation and a hassle-free application process, caveat lending through private lenders makes a caveat loan a fast finance solution.
At DFS, we can pay you funds in as little as 24 hours!
This makes applying for a caveat loan an attractive option for time-poor business owners looking for a quicker solution than most small business loans or tedious bank loans.
No need to undergo a credit check
Those with bad credit needn’t worry; the benefit of accessing private lending is that we don’t sift through your credit history.
Private lenders can offer fast and easy approvals this way as their loan process is around making sure you can meet your repayment schedules and devising an exit strategy.
Used for more than just a business purpose
Historically, a caveat loan was only available to business owners, whereas now, you don’t need an ABN or ACN to access low interest rates and excellent customer service that private lenders such as DFS offers.
Simplified application process
Our application process is kept hassle-free because we do not need to get a property valuation, look at tax returns (or, in the case of a small business, their revenue forecasts) like other lenders do.
Once you know your desired loan amount, we simply make sure you have sufficient equity in a property (bearing in my we cannot accept overseas properties as security) and can get your loan started.
Access a caveat loan even with an existing mortgage
You don’t need to own a property outright to get a caveat loan against it; the caveat sits behind any existing first mortgages meaning we don’t need approval from your home loan or business loan lender.
What can I use a short term caveat loan for?
Fast caveat loans may be the answer to a range of short term finance needs for property owners.
Caveat lending is an ideal solution to access sufficient funding for:
- Business caveat loans are also fantastic for business purposes such as smoothing out cash flow, getting an injection of working capital, expanding your business, for buying stock or paying your tax bill
- Funding the gap between selling your existing property and buying a new investment property. Many property buyers in today’s fierce property market have used fast caveat loans to gain a competitive advantage against other buyers.
- Refinancing or consolidating your debt
- Paying a one-off personal debt quickly
- Renovating your house or improving in preparing for putting it on the market for sale.
If you want to get a caveat loan through private lending, then why not access the best customer service in the private lending space by getting in touch with the team at Diverse Funding Solutions?
You may even want to get your caveat loan application underway by using our simple 1 minute express quote function.
Apply for a caveat to fund your next venture, today through DFS.