As a borrower, you need clearly understand and differentiate cons and pros of caveat loan. It is very important for making right choice from the very start.
The following are the pros of caveat loans:
- Its usually much easier and faster to obtain this type of loan than second mortgage
- Relatively simpler choice for lender to approve and execute this type of transactions
- Legal documentation is simpler and more cost effective
- Great financial instrument giving you ability to borrow up to 90% of your property value
- With caveat in place, borrower has greater power to prevent other loans to be paced and secured against property by other parties.
However, there is some significant downsides:
- Inability to secure other loans, which require property to be used as collateral
- Usually it attracts higher set up costs and interest rate
- Relatively short-term life of this financial facility
- Higher default rates and discharge costs
The Pros and Cons of Second Mortgages
Much like caveat loans , second mortgage is another financial instrument and has its own pros and cons in its own right
The benefits of second mortgage financing:
- Second mortgage are more flexible instrument compare with the caveat loan . They usually don’t prevent you using your property in obtaining other loans . Of course, as a borrower you might have few obstacles and hurdles down the track in obtaining loans using your property as collateral.
- Fixed rate and longer terms
- Lower interest rate
Nevertheless, there is some drawbacks associated with second mortgages
- Your ability to secure other loans using your property as collateral might put you in position for over committing in your financial obligations
- You can easily loose control if you are not careful and don’t have clear exit strategy how and when to repay your second mortgage
- It takes much longer to apply and settle this facility, due to fact that a lot more scrutiny will apply in the due course with your existing mortgage and incoming financier
- It takes usually 10 working days to settle this facility. (in comparison caveat loans could be settled in as little as 24 Hours)
- Upfront fees and charges are usually lower than caveat loan, however in saying this you will need to pay for the sworn valuation, discharge costs and application fee itself.
There are still plenty of variances between caveat loans and second mortgages. Therefore, we are strongly recommend and insist, that borrower with receive independent legal advice and choose for itself which facility is more appropriate and suitable .