Can I get a caveat loan on a property that is for sale, or should I just sell now?

A sale in progress answers the question every short-term lender asks first: how does this get repaid. It also creates a common need. The business has a bill due now, and the money to pay it arrives at settlement in eight weeks. A second group arrives here under more pressure: behind on the mortgage, bank pressing, trying to work out whether to sell straight away or borrow to buy time. That decision comes first.

Behind on the mortgage: sell now or borrow short term to buy time?

Can I pause my mortgage payments while I sell?

Not by simply stopping. Missed repayments add arrears and default interest, and once the bank issues a default notice the enforcement clock starts. What you can do is apply to the bank for a hardship variation. Banks must consider a hardship application, it costs nothing, and it can defer or reduce repayments for an agreed period and hold off enforcement while a genuine sale runs. Tell the bank you are selling, give them the agency agreement and ask for the arrears to be deferred or added to the loan until settlement. Try this before any private borrowing.

Selling now versus borrowing to hold on

Selling now means accepting what the market gives you within weeks, often with the agent and buyers aware you are under pressure. The bank takes its money first, including arrears and costs, and you keep what is left.

Borrowing short term means a caveat loan or second mortgage behind the bank clears the arrears and any other urgent bills. Interest is usually capitalised, so there are no repayments during the term, and the loan is paid out of the sale proceeds at settlement. You buy time to finish repairs, run a proper campaign or wait for a better selling season. The cost is private loan interest and fees, which come out of your equity.

Put the two side by side on one page:

• Quick sale: likely price under pressure, less the bank payout including arrears, less selling costs. That is the equity you keep now.
• Hold and sell properly: realistic price in six months, less the bank payout, less selling costs, less the caveat loan payout including capitalised interest and fees. That is the equity you keep later.

Illustrative only: if a forced sale would achieve $850,000 and a proper campaign would achieve $900,000, the extra $50,000 has to cover the full cost of six months of private lending with room to spare, or the exercise is not worth it. If the two prices are close, sell now.

When borrowing to hold on makes sense

• There is plenty of equity after the bank, so the loan sits comfortably within a conservative loan to value ratio.
• There is a real reason the price will improve: unfinished works, a tenant leaving, a better season or an approval landing.
• You are a business owner, investor or borrowing through a company or trust, so the loan can be made for a business or investment purpose. Most private lenders cannot lend to an owner occupier for personal purposes. See what is a business purpose declaration.
• There is a firm, dated exit: a listing with an agent and a term that covers the campaign plus settlement.

When it does not

• Little equity. The loan costs will eat what is left and you may end up with nothing at settlement.
• An owner occupied home with no business or investment purpose. The hardship variation is the right tool, not a private loan.
• No realistic sale. A loan that cannot be repaid at its end date leads to default interest and enforcement by the new lender as well as the bank.

If you have little or no equity, speak to a free financial counsellor through the National Debt Helpline before signing anything. If you have equity and a genuine reason to hold, the rest of this page explains how the loan sits behind the bank and is paid out at settlement, and the enquiry form is the place to start.

Three stages, three strengths

• Listed, not sold. The exit is expected but not certain. Lenders will look at the asking price against the valuation, how long it has been on the market and the agent’s feedback. Leverage is conservative, and the term should cover a realistic campaign plus a settlement period.
• Contract exchanged, conditions outstanding. Stronger, but finance or due diligence conditions mean the buyer can still walk.
• Unconditional contract with a settlement date. The strongest exit there is. The lender can see the price, the date and the buyer’s deposit. This is a closed bridge and it prices accordingly.

What the lender needs

The contract or agency agreement, a payout figure for the first mortgage, and an estimate of selling costs. The test is simple arithmetic: sale price, less the first mortgage, agent’s commission, legal costs and any tax payable at settlement, must comfortably exceed the caveat loan payout.

How repayment works

The caveat lender’s payout figure is included in the settlement. On the day, the buyer’s funds pay the first mortgagee, then the caveat lender, then the costs, and the balance goes to the seller. The discharge of mortgage and withdrawal of caveat are lodged together with the transfer.

Tell the conveyancer early

The solicitor or conveyancer acting on the sale needs to know about the caveat from the start, so the payout and withdrawal are built into the settlement. A caveat that surprises everyone a week before settlement causes avoidable panic.

Alternatives

Where the need is to buy the next property before this one settles, that is bridging finance, structured around both transactions. Where the sale is of a completed development, see take-out funding.