Caveat Loans Explained
Hi I’m Paul Stone… Director of Australia’s largest national caveat lender… HomeSec Business Finance. and I quickly want to talk about the benefits of short term caveat loans for businesses and investors.
Firstly, WHAT IS A CAVEAT LOAN & HOW CAN IT HELP YOU?
A Caveat Loan (or sometimes referred to as a short term 2nd mortgage ) are fast settling loans, which are structured just for a short term of 1 to 6 months. Unlike normal forms of finance, these loans need to be able to settle quickly…. Generally within 24 hours from the time the application is first lodged. As such, there is no time for valuations, and bank style due diligence, and in many cases, a bad credit history is irrelevant.
It is simply an ASSET LEND. where we secure the loan against a piece of real estate (whether it be a house, unit, land or a commercial property), and the borrower pays it back at a predetermined time in the next few months. This is known as an EXIT STRATEGY. Repayment of the caveat loan could be through a refinance, sale of an asset, business cash flow, commissions due…. Any event that we can verify is a suitable exit strategy.
We mainly go behind your current 1st mortgage, so we effectively sit as 2nd security on your property. Once our loan is paid out, our caveat is removed from your title, and that is the end of the transaction. AND NO, contrary to some myths around the place, your 1st mortgagee (being your bank) will not object and has absolutely no interest in any caveat going on title… simply as it doesn’t affect them in any way.
Here are some real life examples of how a short term caveat loan has saved our customers.
• CASH FLOW CRISIS. We had a plastering firm who had secured a big job, and to secure the big job the director gave 90 day terms to the project builder. The plasterer had 13 other plasterers on site working for him, and at around day 40 of 90, he ran out of money to pay wages. It was a union controlled site, so if no wages were paid, apart from having upset employees, they would be kicked off site. Payday was a Friday and he came to us on a Thursday. We loaned him $65000 for 2 months, and secured the debt against his house in Kew. In 2 months time, he paid us back when he got paid for the job. OUTCOME: We saved his bacon.
• OPPORTUNITY TOO GOOD TO MISS. We had an electrical goods retailer who was notified by an importer of plasma televisions that an order of 500 plasma’s had been cancelled and that the bulk shipment was now on the wharf and the first in with cash can buy the lot off price. It is a straight forward commercial transaction where a manufacturer wants to clear the cancelled order at a reduced price. The retailer stood to make 200% mark up or more if they could get their hands on this stock. The problem was the retailer did not have a spare $150,000 in clear funds.
Knowing that he has less than 24 hours to raise the money or else he would miss out on the deal, he came to us and used the equity in his house to secure the loan. As the LVR was slightly over our 75% limit, we also took a fixed and floating charge over his company to secure the shortfall. The loan was for 2 months, and he used the proceeds from the sale of the plasma’s to repay the loan within 2 months. Yes he paid 6% per month for the money, but made 200% mark up.
• THERE ARE MANY OTHER REASONS why people take out short term caveat loans . They could need access to funds in 24 hours to….
1. Pay off an overlooked or overdue tax debt
2. Fund a short fall on a property settlement
3. Provide cash flow due to an unexpected downturn
4. An urgent advance on a pending refinance or property sale
Don’t forget, for the finance brokers reading this, you NEED to have this product in your product range. Too many brokers shy away from caveat loans for a variety of ill founded reasons…. However at the end of the day, being a finance broker is about finding solutions for your clients. If a client walks in today and needs urgent access to $100,000…. A caveat loan is the ONLY solution!
Still not convinced. Then ask yourself…. if I needed access to a large sum of money by tomorrow (leaving out rich uncles, etc), how would you get it?
NOW LETS TALK ABOUT THE COSTS…. There is a major myth about caveat loans and their costs.
FIRSTLY, these loans are often high risk and they have to settle within 24 hours, so normal bank style checks & due diligence cant be done. PLUS we rely on real estate market appraisals rather than having the comfort of sworn valuations.
SECONDLY, short term caveat loans are just that… short term. Normal lenders (both banks and private lenders) want to build a loan book that grows and grows with each new loan they write, so they have no interest in funding a loan for just a couple of months… they want you to keep their money out there working for them for years… not months. Plus it is just not feasible to charge per annum interest rates of 10%, 20% or even 30% for just 1 or 2 or 3 months.
THIRDLY, one of the reasons HomeSec Business Finance can settle so quickly is because when a loan comes in our team of six staff in our head office all start work on your application. If it was left to one staff member, the process could take days, so there is an enormous cost in just processing the application and getting it from application to settlement in just 24 hours.
Our rates are priced at 4% per month. There is also an establishment fee and legal costs…. ALL
of which are CLEARLY noted on your Letter of Offer and ALL are capitalised into the loan, so there is NOTHING to pay until the end of the loan.
It is funny because if you take out a caveat loan for just 1 or 2 months, the cost is CHEAPER than getting a 12 month 2nd mortgage…. Which is generally written at between 18% and 30%pa.
At the end of the day, these loans are not for consumer use, they are strickly for genuine business or investment purposes. As such, it is a simple case of the borrower doing a cost benefit analysis…. If the benefit of getting the money fast outweighs the cost… GO FOR IT. If the cost outweighs the benefit, DON’T take out the caveat loan.
Put simply, if the loan is going to get you out of short term financial trouble, or enable you to seize the day and make a lot of money using our money, paying 4% is often small change compared to the benefit gained by accessing the funds you need in just 24 hours.
NOW FINALLY… WHAT’S INVOLVED IN GETTING A CAVEAT LOAN AND WHAT DO I NEED TO DO?
It’s a simple as downloading and completing our simple 2 page application form, signing the attached Privacy Consent form, and supplying a few items such as A RATES NOTICE, A RECENT MORTGAGE STATEMENT, 100 POINTS OF ID FOR EACH PERSON ON TITLE…. And that’s IT!
Once we receive that by fax or email, we will assess and provided it does not exceed our LVR limits and it is for a genuine business or investment purpose. your loan will be approved and you will receive an EASY TO READ Letter of Offer which will detail the loan term you requested, the amount we can lend, and the interest rate and fee’s.
If you are happy with that, simply sign it and fax or email it back and we will start processing the loan straight away. You will notice there is a small Acceptance Fee of a few hundred dollars payable up front. This is the only thing you need to pay for up front and is just there as a commitment from the customer to us that they DO want this loan. It also partly covers the costs of our searches, etc. However remember that all other costs (including interest) are all capitalised into the loan so there is nothing to pay until the end of the loan term, when you pay the loan out.
Generally within a few hours of sending the signed acceptance back, we get our in-house legal staff to draw up loan contracts. They will then be emailed to your solicitor within an hour or two.
WHY YOUR SOLICITOR I HEAR YOU ASK. This is for your protection as well as ours. You must sign the loan contracts in the presence of your solicitor so that we know you have sought independent legal advice and you are satisfied that you know exactly what you are signing. (it helps for a much better nights sleep!) You solicitor will also be required to make certified copies of your ID, so we know that the person signing is really the person who owns the property being used as security for the loan.
Once this is done, either hand deliver, courier or post the executed loan contracts and certified ID back to our solicitor’s office in your state. (address details will be in the covering letter that goes to your solicitor)
Once our solicitors have the paperwork back, the documents will be quickly checked, the caveat lodged, and a scanned copy of the documents will be sent to our head office to enable us to transfer the funds to your bank account. At HomeSec, we don’t use cheques… we TT (which stands for Telegraphic Transfer) the funds into your account. This takes 2 hours to appear in your account, and when it does, it is CLEAR funds…. So you are ready to start using the money straight away!!
PRETTY SIMPLE HEY! It is one of the easiest loans you will ever see!
So as long as you have enough equity in a piece of real estate somewhere in Australia…. a genuine business or investment purpose…. And a clear exit strategy…. We’ll get you the funds you need in just 24 hours!
Plus at HomeSec. we lend Australia wide, and we don’t discriminate against customers with a poor credit history or loan arrears. We also lend responsibly. We won’t let a customer get themselves into a loan that we don’t believe they can pay back…. So always tell us everything so we can best assess the situation.
We’ll that’s it… OH BY THE WAY…. BEFORE I LET YOU GO… There is another myth about caveat loan interest rates. There are 2 types of short term caveat lenders…. Those who CAN settle in 24 hours, and those who CAN’T.
There are cheaper rates around, however caveat loans at 2% or 3% per month often need full valuations, full financials, and bank style due diligence and can sometimes take between 5 & 10 days to settle. This is not much use if you DESPERATELY need the money tomorrow. (it’s a bit like the difference between catching a bus or getting a taxi somewhere. The taxi is more expensive, but there is no waiting and it goes direct and is much faster and more convenient than the bus.)
Plus a cheap interest rate is often peppered with fee upon fee…. Including some monthly fee’s which are just interest rates in disguise. In addition, experience has shown that the up front costs that has to be physically paid to the lender up front can run well into the thousands of dollars. So when comparing caveat lenders, look carefully at all the fee’s and charges and don’t be tricked by a cheap interest rate. Also ensure all costs are clearly spelt out in a simple letter of offer…. Which is exactly what you get with HomeSec Finance Express.
Thank you for your time and we look forward to hearing from you when you or your client needs access to cash FAST!