Caveat loan vs second mortgage: which one and when?

A registered second mortgage gives the lender a formal interest in the property with a power of sale, ranking behind the first mortgage. It requires the first mortgagee to sign a deed of priority setting out how much they can lend ahead of the second lender. A caveat gives the lender no power of sale, only the right to block dealings, which is why caveat lenders rely on the borrower needing to refinance or sell to clear it. Because the second mortgage is stronger security, second mortgage lenders can lend at higher total LVR and lower rates.

Second mortgages are slow because of the first lender. Major banks can take weeks to consent and some refuse outright, particularly where the second lender is private. Non-bank first lenders are usually faster. Caveat loans avoid the question entirely: the caveat is lodged, the loan settles, and the first lender is typically not involved. That difference is the whole reason caveat loans exist.

Second mortgage rates from private lenders run around 9 to 15 per cent a year with establishment fees, over one to five years, with monthly interest payments. Caveat loans run 12 to 36 per cent a year equivalent over one to twelve months, usually prepaid. For a six month need the caveat cost is tolerable; for two years it is not, and the second mortgage or a full refinance is the answer.

Need funds within a week: caveat. Need funds for more than twelve months: second mortgage or refinance. First lender will not consent: caveat, then refinance the lot once the pressure is off. Loan is large relative to equity: second mortgage, because the lender will want proper security. A specialist will often use a caveat loan to solve the immediate problem and a second mortgage or refinance to replace it, and price the two together.