Caveat vs Mortgage Loans: What is the difference between the two?

If you’re thinking about borrowing money for personal use or quick cash flow injection, you can consider a number of different loans, including a caveat loan or short-term mortgage loan. These two common finance options are available for individuals and businesses.

Here’s a quick guide that provides a brief overview on the differences between these two secured loan types to help you further understand your short-term finance options.

What is a caveat loan?

A caveat loan is also known as an ‘unregistered second mortgage’ or an ‘equitable mortgage,’ but it’s not like a normal mortgage.

If you own some residential or commercial property, you can use it to take out a loan that’s secured against the value of the property. When the lender approves your application, they lodge a caveat on the title deed of your property. The loan can be lodged on the title, behind your existing mortgage, without requiring consent from your bank to do so.

A caveat gives security to the loan. It shows that the lender has a registered financial interest in the property and indicates that the property has been used as security.

A caveat also serves as a form of an injunction. This formal notice prevents any other dealings on the property until the loan is settled. If a third party tries to register a dealing on that property, the caveat loan provider gets notified. A caveat also prevents you, as a borrower, from selling the property without the permission of the lender or the caveat loan provider.

Once a caveat is lodged on the title of a property, the loan can become available within a few days after application. A property can be used only for a single caveat loan at any one time. Upon loan repayment, the caveat is immediately removed from the property, and it can then be used for another caveat loan if needed.

Short-term caveat loans are increasingly common. They are quick to apply for, require minimal documentation and can also be approved and settled quickly. In particular, private lenders, specialist lenders and fintechs usually are more flexible with credit history (meaning they’ll often approve borrowers that have limited credit history). Short-term caveat loan terms are also flexible (usually between one month and a few years).

What is a mortgage loan?

Another way of securing business finance is through mortgage loans or mortgage financing. This type of loan is not the same as a home loan, which is specifically designed to finance the construction or purchase of a residential property. A lot of lenders don’t’ impose restrictions on how a mortgage loan should be used, as long as you can show a clear exit strategy (meaning how the loan will be paid on time).

Historically, home mortgage loans have been long-term loans provided by banks, which are usually between 20 and 30 years. However, many alternative and private lenders now provide short-term mortgage loans that have a duration of 2-36 months. This is beneficial for borrowers who may only need access to funds for a shorter period of time.

Similar to a caveat loan, mortgage financing is secured against a property. Once a lender approves your application, they lodge their interest against the title deed of your property.

Additionally, you can use a single property as security with more than one lender by taking out a second mortgage. In the event of a foreclosure, the second mortgage lender ranks second in terms of financial claims. The first mortgage lender is first paid back as a priority, whilst the second one is paid with what’s left from the funds.

Where can you use a caveat or mortgage loan for?

Short-term loans and caveat loans can be used for a variety of personal or business purposes, such as:

  • Purchasing a business
  • Quickly sourcing funding for your business (otherwise known as ‘working capital’)
  • Expanding your business
  • Buying stock for the business
  • Debt consolidation or refinancing
  • Paying a one-off large personal debt like a tax bill
  • House renovation or improvement in preparation for sale.

Which loan type?

All loan types are different. Caveat loans and home mortgage loans are just two of the many financing options offered by traditional lending institutions, private lenders, specialist lenders and fintechs. When deciding which type of loan you should get, it’s important to assess your situation and see which best suits your needs and circumstances. You can also compare the loan amounts, caveat loan interest rates, mortgage interest rates and the repayment terms to help determine which loan type is right for you.

Checking out whether you can afford monthly repayment is also a must. Does it fit your budget? How long will you need to repay the loan, and what will happen if you miss a payment?

When applying for a loan, whether it’s a caveat loan or a mortgage loan, you should not hesitate to approach the lender and seek clarification if there’s anything unclear to you. Specialist short-term lender, Mango Credit, offers fast caveat loans, first mortgages, second mortgages and home equity loans with flexible underwriting and minimal documentation. You can quickly and easily apply online.

If you’re unsure, a mortgage broker or an accountant can help you decide which type of loan best suits your requirements.

Takeaway

If you own a property and need funding quickly, caveat loans and home mortgage loans can be a great source of short-term funds for personal or business uses. Both loan types are widely available from a wide variety of lenders in Australia.

 

Mango Credit

Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management

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