Consolidating a caveat loan or second mortgage: when to combine lenders and when to leave the first mortgage alone

It's common for a property to end up with more than one lender on it. A business has a bank or private first mortgage, then needs money quickly for a tax bill or a deposit, and a second lender lends behind the first by registering a second mortgage or lodging a caveat. That works well as a short-term fix, but when the term on one or both loans is ending, the question is whether to refinance everything into one loan or to leave the first mortgage where it is and deal only with the second.

Caveat loans and second mortgages are not the same thing

• A registered second mortgage is a mortgage registered on the title behind the first mortgage. It usually needs the first mortgagee's consent, and the two lenders often sign a priority deed that sets out who gets paid what if the property is sold.
• A caveat loan is secured by a caveat lodged on the title, which stops the property being sold or refinanced without the caveat being dealt with. Caveat loans are quick to put in place, often without the first lender's involvement, and are usually short and priced accordingly. Some first mortgage agreements treat a caveat by another lender as a breach, so it's worth checking yours.

Both sit behind the first mortgage, which is why they're priced higher, and both need to be paid out or dealt with at any refinance or sale.

When combining everything into one first mortgage makes sense

• Both loans are expiring at around the same time and the exit needs more time than either lender will give.
• The first mortgage is also private, so there's no cheap bank rate to protect and one loan is simpler and often cheaper than two.
• The first mortgage is in default or close to it, in which case the first lender's position decides everything and the second can't be dealt with on its own.
• You need more money, and the only way to get it is a single larger facility against the full value of the property.

When it's better to refinance only the second

If the first mortgage is a bank loan at a bank rate, with time left to run and no default, refinancing it to pay out a second mortgage usually makes no sense. You'd swap a cheap loan for a more expensive one and pay break costs to do it. In that case the better answer is often to replace the caveat or second mortgage with a new registered second mortgage with a longer term, which keeps the bank loan untouched. We walked through a version of this in a second mortgage that unlocked equity without touching a cheap bank loan.

The number that decides it is the combined loan-to-value ratio, meaning the first mortgage plus the second as a share of the property's value. We explain the usual limits in what is a second mortgage, and how much can you borrow behind the bank.

A worked example

These numbers are illustrative only and aren't a quote.

A company owns a commercial property valued at $4,000,000, with a $1,800,000 bank first mortgage and a $700,000 caveat loan from a private lender that's due in a month. Combined, that's $2,500,000, or 62.5% of value.

• Option one, refinance everything: a new first mortgage of about $2,650,000 pays out both loans plus costs and some interest. That's 66.3% of value, within a 70% commercial limit, but the bank loan is gone and the whole $2,650,000 is now at a private rate.
• Option two, refinance only the caveat loan: a new registered second mortgage of about $800,000 pays out the caveat loan plus costs and interest, with the bank's consent, and the combined position is $2,600,000, or 65% of value. The $1,800,000 stays at the bank's rate.

Unless the bank loan is about to expire, option two is the cheaper one by a long way, because only $800,000 is paying a private rate instead of $2,650,000.

What to have ready

• Payout figures from every lender on the title, not just the one that's due
• The first mortgage agreement, so the new lender can check whether consent is needed and whether the caveat has caused a breach
• A recent title search, which shows every mortgage and caveat currently registered
• The exit for each loan, which may not be the same

How we do it

Vía Private lends first mortgages from $1M to $20M and second mortgages from $500K to $7.5M, for business and investment purposes, to companies and trusts, secured by property on the East Coast. We'll set out what each structure costs over the time you need so you can compare them, including the total interest, every fee and the exact payout at the end before you sign.

If you've got more than one lender on a title and one of them is due, send us the scenario with the payout figures for each loan. For the wider refinance process, read refinancing a private loan to another private lender.

Illustrative figures only, and not an offer of credit. Actual rates, fees and terms depend on the security, structure, LVR and exit strategy of the individual transaction. Vía Private is an Australian non-bank private credit lender providing property-secured commercial loans to companies and trusts for business and investment purposes. All lending is subject to credit approval and valuation. General information only, not financial or credit advice.