Caveat loans when the property already has a mortgage

Very few business owners have property with no loan on it at all. The good news is that a caveat loan is designed for exactly that situation. It sits behind your existing mortgage, draws on the equity above it and leaves the bank loan alone.

How does a caveat loan sit behind a first mortgage?

Think of your property’s value as a stack:

Layer	What it is
Top	Your remaining equity (what’s left for you)
Middle	The caveat loan, protected by a caveat on title
Bottom	The first mortgage, registered and paid first

If the property is sold, the proceeds are applied from the bottom up: the first mortgage is paid out, then the caveat lender, then whatever is left goes to the owner. That’s why the caveat lender cares so much about the combined LVR — it wants a healthy layer of your equity above its loan.

What happens to the existing mortgage?

Nothing. It isn’t refinanced, discharged or varied. Your repayments, interest arrangement and the bank’s registered priority all stay the same. That’s one of the main reasons a caveat loan can be quicker than refinancing: there’s no bank queue to join.

Keep paying it, though. A default on the first mortgage affects the whole stack, and the caveat lender’s documents will usually treat it as a default on their loan too.

Which clause in your mortgage should you check?

Many first mortgages include terms that restrict you from giving further security over the property or borrowing against it without the lender’s consent. The wording varies — “negative pledge”, “further encumbrances”, “further security” — but the idea is the same.

What it means for you:

• It doesn’t stop a caveat being lodged. The registry records the caveat regardless of what your bank contract says.
• It can matter to your bank. Borrowing against the property in breach of your mortgage terms could give the bank rights under its contract.
• So check before you sign. Read the security clauses, or ask your bank or lawyer to confirm the position.

In practice, many owners proceed once they understand the position. Some ask their bank for consent. Some decide a different structure is better. The point is to know before you borrow, not after.

Unsure how much room there is above your mortgage? The Feasibility Checker works it out, or send the numbers to a specialist.

How do you measure the equity above the mortgage?

Use the payout figure, not the balance on your last statement. The payout includes accrued interest and any fees to discharge. If you have a redraw facility or a line of credit secured on the property, the lender may count the full limit, not just what’s drawn. Then:

Combined LVR = (payout figure + any other secured debt + caveat loan) ÷ value

Our borrowing capacity page has worked examples.

What if there’s already a second mortgage or another caveat?

It’s still possible, but each layer makes the next one harder:

• The new lender sits further back in the queue.
• It will want to understand every existing interest and why it’s there.
• The combined LVR has to leave enough equity above all of them.

A title search will show everything registered or lodged. Our guide on reading a title search walks through it.

Should you ask your bank for more money instead?

Sometimes, yes. If you have time, a strong file and your bank is willing, a top-up or refinance may cost less over a longer term. The trade-off is time, paperwork and the bank’s assessment. Our equity check guide compares the two paths and shows how to get ready for either.

A caveat loan tends to win when:

• the deadline is shorter than the bank’s turnaround;
• the need is short and the exit is clear; or
• the bank has declined, or would take too long to say yes.

An illustrative example

Illustrative only.

A Hobart builder needs $130,000 for a materials account. His home is worth about $780,000 and the bank loan’s payout figure is $395,000, including a redraw facility with a $40,000 limit that isn’t drawn. The caveat lender counts the redraw limit, so the existing secured debt is treated as $435,000. A $140,000 caveat loan including costs brings the combined LVR to about 74%. That’s tight, so he reduces the loan to $100,000 — enough to cover the most urgent invoices — which brings the combined LVR to about 69%, and pays the balance from a progress claim due the following month.

Before signing, he reads the security clause in his home loan contract and discusses it with his bank. The bank loan continues unchanged throughout.

Checklist before borrowing behind a first mortgage

• Current payout figure from your bank
• Any redraw or line of credit limits secured on the property
• The security or “further encumbrance” clause in your mortgage contract
• Your repayments on the first mortgage fully up to date
• A clear exit for the caveat loan

Ready to use the equity above your mortgage?

Tell us the property, the payout figure and what you need. We’ll tell you how much room there is — and whether a caveat loan is the right tool.

It takes about a minute and there’s no credit check just to ask. We won’t pass your details around a crowd of lenders; one specialist reviews them and calls. The payout figure matters most here, so please make it as current as you can.

Check the equity above your mortgage →