What does a caveat loan cost? Rates, fees and terms

A $200,000 caveat loan at 2 per cent per month for a six month term. Interest is $4,000 a month, $24,000 for the term. Establishment fee at 3 per cent is $6,000. Legal and caveat fees say $3,000. If interest is prepaid, the borrower receives $200,000 less $24,000 less $9,000, about $167,000, and repays $200,000 at the end. The real cost of $167,000 for six months is about $33,000, which is roughly 40 per cent annualised. That is the honest number to compare against the alternative, whether that is losing a deposit, a business failing to trade, or an ATO default.

Legal fees for the lender's solicitor as well as your own. A valuation fee if one is ordered. Caveat lodgement and withdrawal fees. Extension fees if you need more time, often 1 to 2 per cent of the loan per extension. Default interest, which can be double the standard rate and is triggered by missing the end date by a day at some lenders. Some lenders charge a minimum interest period, so repaying early does not reduce the cost below three months' interest.

Ask each lender for the net advance in dollars, the total repayable in dollars, the term, the default rate and the extension terms. Divide the difference between total repayable and net advance by the net advance and the term to get a monthly cost you can compare. A specialist will do this on every offer, because private lender term sheets are written to look cheaper than they are.

When the loan prevents a larger loss: forfeiting a 10 per cent deposit on a purchase, a business missing payroll, an ATO debt tipping into enforcement, a development site being lost. When the loan makes money: settling a discounted purchase, completing a project to sale. It is rarely worth it as a substitute for a mortgage on an ordinary cash flow problem, because the monthly cost compounds fast.