What a caveat loan is
A caveat is a notice lodged on a property's title that tells anyone searching the title that someone else has an interest in it. With a caveat loan, the lender lodges a caveat over a property you own as security for a short-term business loan. The caveat stops the property being sold or refinanced without the lender knowing, which protects their position until you repay.
Because no new mortgage has to be registered, caveat loans can be arranged far more quickly than most secured lending. They usually sit behind an existing home loan or business loan, which is why they're often described as second-position lending.
When business owners use them
- An ATO debt with a deadline, including a garnishee notice or director penalty notice.
- A deposit or settlement shortfall on a business or property purchase.
- Wages, stock or materials while a large payment is on its way.
- Releasing cash for an opportunity that won't wait for a bank's timeline.
How a caveat loan works, step by step
- Your broker confirms the amount, the property and how you'll repay.
- The lender checks the property's value, often with a desktop or short-form valuation, and searches the title.
- You receive a loan offer setting out the rate, fees, term and repayment date.
- You sign the documents and get independent legal advice if the lender requires it.
- The lender lodges the caveat and pays out the funds, sometimes within a few business days of a complete application.
- You repay by the agreed date, and the caveat is withdrawn.
What it costs
Caveat lenders usually quote interest as a monthly rate, and many take the interest for the whole term up front or add it to the loan. On top of interest, expect an establishment fee, the lender's legal costs and a valuation fee. Because terms are short, fees make up a large share of the total cost, so compare options on the total dollar amount you'll repay. Your broker will set that out in writing.
What lenders look at
- Equity in the property. Value less existing loans. Many caveat lenders keep total lending at or below around 70% of value.
- A clear exit. A property sale, refinance, contract payment or other definite source of repayment within the term.
- Your existing mortgage terms. Some first lenders treat a caveat as a breach, so this is checked before anything is lodged.
- A business purpose, confirmed in writing.
Risks to understand
- Terms are short, often one to twelve months. If you can't repay on time, extension fees and default interest add up quickly.
- If the loan isn't repaid, the lender can sue for the debt and take steps against the property.
- A caveat can delay a sale or refinance until the lender is paid out, so build the payout into your plans.
Not sure whether a caveat loan or a second mortgage is the better fit? Read caveat loan or second mortgage: which suits your business.