What is a caveat loan.
Caveat loans are just one form of the many private lending services we offer.
A caveat is a legal mechanism by which a security interest is registered against a property. It is one of the easiest ways to register a security interest against an asset, and must have legal grounds for its registration.
A caveat loan, is where funds are loaned to a borrower, with a caveat registered as security for the lender.
Caveat loans are far easier to register and quicker than a first mortgage loan or second mortgage loan.
Some caveat loans will be CR2, meaning they are a caveat with the right to register a second mortgage. This essentially gives the borrower funds quickly and gives the private lender security to register a second mortgage at a later point in time.
Scenarios for caveat loans to be used.
Caveat loans should be used only in specific circumstances. These include but are not limited to.
- When the borrower needs funds quickly.
- When the quantum of funds needed are small compared to the rest of the debt on the property.
- When the loan duration is under one year.
- When the combined cost of the caveat loan plus the other loans, is cheaper than refinancing the whole debt.
- When a borrower won’t qualify for further funds from a bank.
Essentially caveat loans should be seen as a sprinter and not a marathon runner, and should only be used in a specific set of circumstances.
What considerations should be made when considering a caveat loan.
Caveat loans cost more than a bank loan or a first mortgage private loan, because they carry more risk for private lenders. Therefore, they should only be used in specific circumstances, and where the problem they solve is greater than their cost.
Borrower must also think about how they will repay the caveat loan!
Will it be via bank refinance?
A sale of a property?
A private loan refinance?
Or profits from a business venture?
When do people use caveat loans?
Most borrowers use caveat loans for business and investment purposes. Typically, these borrowers need funds quickly, to take advantage of opportunities.
Other times borrowers will use caveat loans for bridging purposes, or to access the equity in one of their properties for a deposit on another investment property.
Typically we see caveat loans being used, when borrowers needs quick access to the equity in their properties, or they require very small amounts of money that would not justify a mortgage.
Business funding and caveat loans
Caveat loans are highly suitable for business purposes, because it allows business owners to access the equity in their properties and put that capital to good use in their business! Caveat loans are suitable for businesses, because repayments can be interest only or they can be capitalised.
Alternatives to caveat loans
There are cashflow lenders that lend on cashflow basis but at much higher rates. You may wish to consider invoice financing, or refinancing your loans as a private first mortgage loan (especially if the loan term is going to be longer).
To learn more about caveat loans, click here.
For a confidential discussion for a caveat loan for you, click here.
