Securing funding through traditional lenders such as banks can be a lengthy and rather complicated process. Strict lending guidelines require applicants to provide an extensive amount of financial information and the lengthy approval process can be frustrating.
Caveat loans are an alternate financing option which allow you to borrow money using the available equity in your property. They also have the added benefit of a streamline application process that ensures funds can be provided in less than 48 hours.
What is a Caveat Loan?
A caveat loan is a form of funding where finance is obtained by using real estate or property to secure the debt. One of the key characteristics of caveat loans is that the loan term is significantly shorter than traditional loans. Short term caveat loans are usually structured over a period of 1 month to 36 months with a large portion of loans paid off within the first year.
This makes caveat loans very popular with business owners who have a proprietary limited (Pty Ltd) company and a property that can be used as security. Fast caveat loans are popular among business owners looking to:
- Expand, rebrand, or renovate
- Increase cash flow to purchase equipment or inventory
- Manage operations during peak and off-peak periods for seasonal businesses
- Access capital to start a new business.
The versatility and fast approval process mean that borrowers can use caveat loans for a variety of purposes. A more relaxed lending criteria also makes them accessible for borrowers who are finding it difficult to deal with banks due to bad credit history or a lack of detailed financial statements.
How do Caveat Loans work?
Caveat loans are simple in nature and flexible in practice. They relate to finance obtained via a loan that is secured against the equity in a piece of real estate owned by the borrower. To properly understand how caveat loans work, it is essential to understand the following basic terms:
- Property Value: The appraised value of the real estate being used as security
- Loan to Value Ratio (LVR): The loan to value ratio is the amount being borrowed represented as a percentage of the total value of the piece of real estate
- Equity: The difference between the property value and any outstanding debt.
In the following example, a business owner has an unencumbered personal property valued at $1,000,000. The property is in a metropolitan area and with no money owing on the premises, Simply Funds can offer a LVR of 70%. Using the value of the property and LVR, we can calculate the amount that can be borrowed:
=Value of Property x LVR
=$1,000,000 x 0.70 (70%)
If there was an existing mortgage on the property, the business owner would have to apply for a second mortgage rather than a caveat loan.
How are Caveat Loans secured?
For a caveat loan to be approved, the lender must be able to apply a caveat on the property being used as security. The loan is the money received by the borrower while the caveat is the document that is lodged on the title of ownership.
The caveat serves several purposes; It allows the lender to register a financial interest in the property and subsequently proceed with the lending transaction. In addition, the caveat prevents the owner from selling or transferring the property along with restricting them from using it as security to obtain further finance.
What is the difference between a caveat and a mortgage?
There are several key differences between a caveat and a mortgage. The most notable are the rights of the lender, lending criteria, and several factors relating to time.
Rights: Despite preventing the owner from undertaking certain actions with respect to the property (selling, transferring, use as security), it is in the right of the lender where the difference lies. Unlike mortgages, the lender (Simply Funds), does not have the right to sell the property if the borrower fails to make repayments and defaults.
Time: This applies to several different aspects of the loan including the application process, funding, and structure. A caveat loan application with Simply Funds can be made in a matter of minutes. Loan approval and subsequent funding can be achieved in less than 48 hours where required. In comparison, a mortgage application can take weeks, or even months. Furthermore, short term caveat loans are generally repaid within a 12-month period while home loan terms range from 10 years to 30 years.
Lending Criteria: Major financial institutions such as banks have made it increasingly difficult for business owners to obtain finance. Their strict lending criteria requires borrowers to provide in-depth financial records including bank statements, cash flow projections, tax returns, expenditure reports, and sales records. They also require an excellent credit history and formal property valuations. Alternatively, Simply Funds provides an obligation-freeapplication process that can be completed in minutes with no credit checks conducted for pre-approval. Our flexible lending criteria allows us to provide finance using basic personal and business details.
Using a Caveat Loan to buy a house in Sydney?
Although it is not common, there are circumstances where short term caveat loans are used to purchase property. Examples include where borrowers require cash flow in the form of a short term loan to complete the purchase of a house, commercial real estate, or other forms of property.
Similarly, we have helped clients take advantage of great financial opportunities by providing them with a fast caveat loan that has allowed them to secure the purchase of a property in a matter of days. Part of this strategy is to pay off the short term loan by selling following a rise in property value, or refinancing with a major lender.
Simply Funds also provide development loans that can be used for both residential and commercial dwellings. Contact us today for more information on our flexible lending options.