Caveat Loan vs Second Mortgage: Which Do You Need?

Key takeaways

• Caveat = notice of interest, fast, short, dearer. Second mortgage = registered security, slower, cheaper.
• A second mortgage generally needs the first mortgagee to consent; a caveat does not.
• Both depend on your equity, not your property value.
• Both are business-purpose products in most cases.

The difference in one table

Both let you borrow against equity in a property that already carries a mortgage. The difference is the strength of the security the lender takes, and everything else - speed, cost, term - follows from that.

The consent requirement is usually what decides it in practice. Obtaining a first mortgagee's consent and a deed of priority takes time you may not have, and the first mortgagee is under no obligation to agree.

Will the first mortgagee consent to a second mortgage?

Sometimes, and it is entirely at their discretion. A first mortgagee is more likely to consent where the combined lending leaves a comfortable equity buffer, your repayment record with them is clean, and the second lender will sign a priority deed capping the first mortgagee's exposure.

They are unlikely to consent where the combined position is tight, where you are already in arrears with them, or where the second loan looks like it will make your overall position harder to service.

Consent usually comes with conditions and a fee, and it takes time to obtain. If your transaction cannot wait for it, that is the practical argument for a caveat loan - and it is worth checking whether your first mortgage contract restricts further encumbrances before lodging one.

Which one should you use?

Use a caveat loan when the timing decides the outcome: a settlement in days, an auction deadline, a supplier who must be paid this week. You are paying a premium for speed, and that is a rational trade when the alternative is losing the transaction.

Use a second mortgage when you have weeks rather than days and the need runs for months rather than weeks. The lower cost and longer term compound in your favour, and the registered security often means a larger advance against the same equity.

For either, the lender's first question will be how the loan gets repaid. Both are short-term instruments and both expect a defined exit - a property sale, a refinance, a project completing or a large receivable landing.

Frequently asked questions

Is a caveat loan cheaper than a second mortgage?

No, generally dearer. You are paying for speed and for the lender accepting weaker security. If you have time to arrange a second mortgage properly, it usually costs less and can run longer.

Can I get a second mortgage with bad credit?

Often, because the assessment weighs equity and the exit heavily. Credit impairment affects pricing and the maximum advance, and the first mortgagee's consent can become harder to obtain if you are in arrears with them.

What if the first mortgagee refuses consent?

A second mortgage generally cannot proceed. The alternatives are a caveat loan, refinancing the first mortgage to a lender who will allow the second, or restructuring the whole facility with one lender.

Related reading

• What Is a Caveat Loan and How Fast Can You Get One?
• Why Private Loan Rates Are Higher Than Bank Rates
• Private Loan Fees: Establishment, Brokerage and Exit Costs

Sources

• Moneysmart - borrowing against property — ASIC
• National Credit Code — Australian Government