In Australia's private lending market, two common structures dominate: caveat loans and first mortgage loans. While both provide fast, flexible capital outside the traditional banking system, they differ significantly in how they are secured, what they cost, and the level of risk involved for the borrower. Choosing the wrong structure can be an expensive mistake.
This article explains the key differences between caveat loans and first mortgage private lending, and helps you determine which is appropriate for your situation.
What Is a Caveat Loan?
A caveat loan is a short-term facility secured by a caveat registered on the title of a property. A caveat is a legal notice that signals an interest in the property — it does not give the lender a mortgage over the asset. Instead, it prevents the borrower from selling or further encumbering the property without the caveat holder's knowledge.
Key characteristics of caveat loans:
- Speed: Caveat loans can often be arranged within 24 to 48 hours because they do not require the same level of due diligence as a registered mortgage.
- Very short terms: Typically 1 to 3 months, sometimes as short as 30 days.
- Higher cost: Interest rates on caveat loans are generally significantly higher than first mortgage private loans — often ranging from 2% to 5% per month or more.
- Weaker security position: Because a caveat is not a mortgage, the lender's recovery options in the event of default are more limited and complex. This higher risk to the lender is reflected in the higher cost to the borrower.
- Often sits behind existing debt: Caveat loans are frequently used when there is already a first mortgage on the property, meaning the caveat lender ranks behind the first mortgagee in any recovery.
What Is First Mortgage Private Lending?
First mortgage private lending involves a registered first mortgage over the borrower's property — the same legal instrument used by banks. The lender holds the primary secured position on the asset, which provides the strongest possible protection in the event of default.
Key characteristics of first mortgage private loans:
- Registered security: A first mortgage gives the lender clear priority and well-established enforcement rights under Australian property law.
- Longer terms: First mortgage private loans typically run for 6 to 12 months or longer, providing borrowers with a reasonable timeframe to execute their exit strategy.
- Lower cost than caveats: Because the lender's security position is stronger, the risk premium charged to borrowers is lower. First mortgage private lending rates start from around 10% per annum — significantly cheaper than the annualised cost of most caveat facilities.
- More thorough process: Registering a mortgage requires a valuation, legal documentation, and proper due diligence. This takes slightly longer than a caveat — typically 5 to 10 business days rather than 1 to 2 days — but the result is a more robust and transparent arrangement for both parties.
Esteb Capital operates exclusively in the first mortgage space, providing lending from 10% per annum for business and commercial purposes across Australia. We believe the first mortgage structure delivers better outcomes for borrowers and lenders alike.
Comparing the True Cost
The headline difference between caveat and first mortgage lending is cost, and the gap is substantial when you annualise the numbers.
A caveat loan charging 3% per month equates to 36% per annum. Even on a small loan of $200,000 over three months, the interest cost is $18,000. A first mortgage private loan at 12% per annum on the same amount for six months would cost $12,000 in interest — less money for twice the term.
When you factor in establishment fees, legal costs (which in both cases are typically borne by the borrower), and discharge fees, the total cost differential between the two structures is even more pronounced over equivalent periods.
The Annualised Rate Trap
Caveat lenders sometimes present their pricing as a monthly rate, which can obscure the true cost. Always convert to an annualised rate for comparison purposes. A "reasonable-sounding" 2.5% per month is 30% per annum — three times the rate of a first mortgage private loan.
When Does a Caveat Loan Make Sense?
Despite the higher cost, there are scenarios where a caveat loan may be the appropriate choice:
- Extreme urgency: If you need funds within 24 to 48 hours and a first mortgage timeline of 5 to 10 days is too long, a caveat may be the only option.
- Existing first mortgage that cannot be discharged: If there is already a first mortgage on the property and you need additional funds quickly, a caveat behind the existing mortgage may be the only available structure.
- Very short-term need: If you genuinely need funds for only two to four weeks and the total cost is manageable relative to the benefit, the convenience of a caveat may be justified.
In all other situations, first mortgage private lending will be cheaper, more transparent, and better structured for the borrower.
When Is First Mortgage Private Lending the Better Choice?
First mortgage lending is preferable in most private lending scenarios, including:
- Property acquisitions: When purchasing a property, a first mortgage from settlement is the natural structure.
- Refinancing existing debt: Replacing an existing first mortgage with a private first mortgage avoids the cost and complexity of layering a caveat on top of existing debt.
- Equity release for business purposes: Accessing equity in an unencumbered or lightly encumbered property is most efficiently done through a first mortgage.
- Funding projects over 3 months: The interest-only structure of a first mortgage loan with 6 to 12 month terms provides a stable, predictable cost base that a rolling caveat arrangement cannot match.
Questions to Ask Before Choosing
Before committing to either structure, ask yourself:
- Do I genuinely need funds within 48 hours, or can I plan for a 5 to 10 day settlement?
- Is there an existing first mortgage on the property? If so, can it be refinanced?
- What is the true annualised cost of the caveat facility compared to a first mortgage option?
- How long will I realistically need the funds? Am I being honest about the timeline?
- What are the total costs — including legal, valuation, and discharge fees — for each option?
Making an Informed Choice
The Australian private lending market offers genuine flexibility for borrowers who need capital outside the traditional banking system. But flexibility does not mean all options are equal. A first mortgage private loan — with its lower cost, longer terms, and stronger legal framework — is the right choice for the vast majority of commercial and business-purpose borrowers. Caveat loans serve a narrow purpose and should be used only when the specific circumstances genuinely require them.
At Esteb Capital, we provide first mortgage lending across Australia because we believe it is the structure that best serves our borrowers. If you are weighing up your options, we are happy to discuss how a first mortgage facility compares to any alternative you have been offered.