Caveats and second mortgages: the solution to tightening bank criteria?

by NZ Adviser25 Jun 2020

Households and businesses across New Zealand are feeling the economic fallout from COVID-19. This, coupled with main bank lending criteria tightening, has found many customers unable to meet bank requirements for a traditional mortgage top up.

As a result, mortgage advisers are now looking for alternative funding options to release equity from their client’s residential or commercial properties – and a caveat or second mortgage could be the answer.

What is a caveat vs a second mortgage?

In Latin, ‘caveat’ means ‘let the person beware’. The purpose of a caveat is to warn all persons that someone (in this instance, the lender) claims an interest in the land/security. It’s simply a warning that protects the lender and requires the owner to seek the caveator’s consent before selling the property.

Should a caveat-secured lender have to proceed to a Property Law Act notice (PLA), they will need to upgrade their caveat to a second mortgage.

What are the benefits of a caveat or second mortgage and when are they used?

If a client is declined a top-up on their existing mortgage because they don’t meet the bank’s lending criteria or their credit profile has deteriorated, their borrowing options may be limited. They could refinance their mortgage with a new lender, but that can be costly, with legal fees, break costs, valuations fees, establishment fees and perhaps most significantly, the potential loss of their existing competitive bank interest rates.

Caveats or second mortgages offer a great alternative.

The funds from a caveat or second mortgage are typically used for:

  • Major debt consolidation (possibly with some patchy repayment history)
  • IRD bills
  • Funding final stages or cost overruns of a build /renovation
  • Capital injection into their business

Caveats are a type of security, rather than a loan product. Depending on the client circumstances, a caveat can be used to apply for:

  • Short-term interest-only loans (with a clear exit plan)
  • Capitalising loans if their equity position allows (once again a clear exit plan is important)
  • Principal and interest reducing loans - typically up to a 10-year term.

Once their personal circumstances or the banks’ requirements have changed, they can look to refinance their caveat or second mortgage loan back to their main bank.

Who provides caveat and and second mortgage loans?

Typically, non-bank specialist lenders provide caveat and second mortgage loans. Each lender will have unique terms and conditions, so it’s important to fully understand and compare them to ensure that you are matching your clients’ needs with the most appropriate and cost-effective solution.

Summary

In short, caveat or second mortgage secured loans can be used to release equity in a property without the need for a refinance of the first mortgage. This maintains the client’s existing main bank relationship and competitive interest rates for the majority of their lending, but still provides an immediate solution to their pressing financial needs. 

Caveat and second mortgage secured loans:

  • Provide an alternative for when a mortgage top-up is not possible.
  • Allow the borrower to retain their existing mortgage and interest rate.
  • Are often a quick, cost-effective way to meet pressing financial needs.

This article was provided by Avanti Finance a NZ-based specialist lender that provides a broad range of financial solutions including caveats and second mortgages, personal loans, car loans, business loans, bridging loans and long-term first mortgages. You can find them at www.avantifinance.co.nz.

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