Bad credit caveat loans, and what a caveat lender actually checks

A caveat lender is relying on equity in real property and on how the loan will be repaid, so the decisive search is a title search rather than a credit check. A low score, defaults and arrears are usually context. What stops a file is narrower: something already recorded against the title, a current bankruptcy, a proprietor who will not sign, or no real equity once payout figures are used.

The decisive search is a title search

If you have been declined by a bank or a cash flow lender, the thing that declined you was almost certainly a score, a turnover test or a set of bank statements. A caveat lender is not looking at those, and not out of generosity: a lender relying on equity in real property has to form a view about the property and about how it gets paid out, and neither question is answered by a credit report.

So the order of the searching is the reverse of what most people expect. The title comes first, the payout figures come second, the exit comes third, and the credit file comes last and is read as context. That is also why an indicative answer takes a phone call rather than a week: the three things that decide it can all be looked at on the spot.

You are not the first one this week

Most owners in this position have asked their bank first, and the bank said no for reasons that had nothing to do with whether the loan would be repaid — a mark on the credit file, a late lodgement, financials that are a year out of date. Those are the things a bank exists to care about. None of them says anything about whether there is unused equity in a property.

That gap is where HomeSec has been since 2004. We are not here to judge the situation, we are here to find solutions, and we have seen this one often enough that it does not surprise us. What we look at is whether there is sufficient equity in real estate and whether the purpose is a genuine business one. No financials, no credit score threshold, and a real person reads every file rather than a scorecard. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months, so there is nothing payable while the business gets its feet back under it.

Back to the assessment itself, because what a caveat lender checks is worth knowing before you ring anybody.

What a caveat lender checks, in the order it gets checked

1. 1
   The title, and everyone named on it.Who the registered proprietors are, what is registered against the land, and whether anything is already recorded that would sit ahead of us. Every registered proprietor has to sign, which is the single most common thing that holds a file up — a co-owner who has not been told, a former spouse still on the title, a parent who went guarantor years ago and has since moved interstate.
2. 2
   The payout figure, not the loan balance.What the existing lender would actually need on the day, including anything capitalised, arrears and whatever it adds for discharging. People calculate their equity from a statement balance and are then short. A payout figure is free and takes a phone call to the lender, and our guide on getting a mortgage payout figure sets out how to ask for one.
3. 3
   The equity that is left, against the LVR limits.Up to 80% of a residential property's value or 70% of a commercial one, less what is owing — from $20,000 to $5,000,000. HomeSec does not use valuers, which is a large part of why this can be settled in days rather than weeks.
4. 4
   The exit.The question that replaces serviceability. What repays this loan, and when: a sale, a refinance that is already in train, a progress claim certified, a settlement that is dated. An exit that is a hope rather than a mechanism is the most common reason a file with plenty of equity still does not proceed.
5. 5
   The purpose.Business or investment, wholly and exclusively. Credit provided for those purposes is not regulated under the National Consumer Credit Protection Act 2009 (the NCCP Act), and the protections available to consumer borrowers do not apply. The purpose of the funds decides this, not which property secures them, and a file where part of the money is personal changes character entirely. It is much better to find that out in the first few minutes than at documents.
6. 6
   The credit file, read as context.Accessed with your consent at formal approval rather than before an indicative answer. There is no score threshold to clear. What it is being read for is a current bankruptcy, a judgment that may have reached the title, and whether the story on the file matches the story on the phone — not whether the score is good.

The four things that actually stop a file

None of them is a credit score, and three of the four appear on a title search you can get before you apply.

A judgment is the one credit event that can reach the title

This is the part worth reading twice, because it is the one place where bad credit stops being a matter of opinion and starts being a matter of registration. A judgment sitting on a credit file is a credit event. A judgment that has been turned into a writ and recorded against your land is an encumbrance in all but name.

In New South Wales the mechanism is section 105 of the Real Property Act 1900. On an application that identifies the land, encloses a sealed copy of the writ and establishes that the judgment debtor named in it is the registered proprietor, the Registrar-General may record the writ against the title — and it has to be lodged before the writ's own expiry date. The Act is explicit that the writ does not itself create an interest in the land. What it creates is a queue problem.

The queue problem is in section 105A. Where a writ is recorded and a dealing affecting that land is lodged for registration within what the Act calls the protected period, the Registrar-General must not register the dealing during that period unless the writ is referred to in the dealing as if it were a prior encumbrance. The protected period starts when the writ is recorded and ends six months later, or when the writ expires, whichever happens first. A mortgage given by the judgment debtor can still be registered inside that window where it carries the consent required under section 113(6)(b) of the Civil Procedure Act 2005 — which is to say, where the judgment creditor has agreed. And if the writ has not been executed by a sale of the land within the protected period, a dealing lodged before any such sale may be registered despite the recording.

Two practical consequences follow. The first is that a recorded writ is a negotiation rather than a wall: in the ordinary case the judgment is paid out of the same settlement, the creditor consents or withdraws, and the file proceeds. The second is that your existing bank is untouched by any of it — the Act expressly carves out dealings by a mortgagee exercising powers under a mortgage that was recorded before the writ. The writ changes the order of the queue behind your first mortgagee, not your first mortgagee's position in it.

One further wrinkle that catches people whose property is held through a trust: where the land appears to be held by the registered proprietor in a fiduciary capacity, the Registrar-General may refuse to record a writ at all unless the judgment was against the proprietor in that capacity. A judgment against a director personally does not automatically reach land held by their trustee company. It also does not mean the loan is simpler, because a trustee borrowing has its own requirements.

Those provisions are the New South Wales ones. Every state records judgments against land under its own legislation and the periods differ. If anything is already on your title, the document that answers it is a current title search from your own state's land registry.

Bankruptcy is the one that cannot be structured around

A discharged bankruptcy is a credit event and we read it as one. A current bankruptcy is a different category, and the reason is ownership rather than risk appetite. AFSA says it as plainly as it can be said: when you become bankrupt, your trustee becomes the owner of your share of any house or property that you own, and the trustee has control over the property and can sell it to pay your debts. The Bankruptcy Act vests the bankrupt's divisible property in the trustee from the start of the bankruptcy.

So the person who would need to grant the security is no longer the person who can grant it. There is nothing for a lender to take a caveat over, and no structure that fixes that. AFSA also notes that a trustee or a secured creditor can make a claim against the house even where there is no equity in it. If a bankruptcy is current, the conversation that matters is with the trustee, and after that with an insolvency practitioner — not with us, and we would rather say so on the first call.

What a caveat lender genuinely does not weigh

Having been clear about what stops a file, it is worth being equally clear about what does not, because the list is longer than most people expect and every item on it is a reason somebody has already been declined elsewhere.

• A credit score. There is no minimum, because there is no scorecard — a Lending Manager reads the file.
• Defaults and judgments on the file, as distinct from a writ recorded against the land. Our page on bad credit business loans sets out what each event on a credit report actually changes here, and for how long each one stays.
• An ATO debt, including one under a payment plan that has defaulted. A garnishee notice attaches to a bank account, not to a land title.
• Tax returns, BAS or ASIC lodgements that are behind.
• Turnover, bank statements and time trading. There is no serviceability test; the exit does that work.
• Having been declined elsewhere, which is how most of our files start.

If a cash flow lender is the one that said no, the reason it said no is usually worth understanding before applying anywhere else, and what a cash flow lender decline actually tells you goes through it.

Where a caveat loan is the wrong answer

Three situations, said plainly, because a page that only lists what it can do is not worth trusting.

If there is no unused equity in real property anywhere in the ownership group, this is not our answer and no amount of good will changes that. The conversation is with your accountant and with the creditor, and we will tell you on the first call rather than after a week of hope.

If the purpose is personal rather than business, a caveat loan from a business lender is not the product, whatever the security. HomeSec lends wholly and exclusively for business and investment purposes.

And if the business is losing money every month and the pressing creditor is simply the most visible part of that, borrowing against the family's equity is how people lose the house as well as the company. A loan buys time. It does not buy a plan, and where there is no realistic exit the honest answer is that more debt is the wrong instrument. That conversation belongs with a restructuring practitioner or a registered liquidator, and our guide on small business restructuring is a reasonable place to start.

Before you ring anybody

1. 1
   Get a current title search.Your conveyancer or solicitor can obtain one in minutes, and it answers three of the four things that stop a file: who is on the title, what is registered against it, and whether anything is already recorded ahead of a new lender.
2. 2
   Get a payout figure from every existing lender.Not a statement balance. This is the number the equity is actually calculated from, and it is the one people are most often wrong about.
3. 3
   Work out who has to sign, and tell them.Every registered proprietor. If one of them does not yet know the loan is being considered, that is the conversation to have before the one with a lender.
4. 4
   Write down the exit in one sentence.What repays this, and when. If the sentence needs a paragraph, the exit is not ready, and that is worth knowing before an application rather than after one.
5. 5
   If there is a judgment, find out whether a writ has been recorded.It will be on the title search. A judgment creditor that has gone that far has to be dealt with at settlement, and raising it at the start costs nothing while raising it at documents costs the deadline.

What a caveat loan is, how it ranks behind your existing mortgage and what it means while it sits on the title are covered on our caveat loans for business page, and the mechanics of a caveat itself — what it stops, who may lodge one and the three ways it comes off — are on what a caveat on a property means. Neither is repeated here.

This page explains what a caveat lender assesses and what the New South Wales writ provisions say. It is general information, not legal, insolvency or financial advice: what applies to your title, your judgment or your bankruptcy is a question for a solicitor, a registered liquidator or your own state's land registry, and the Real Property Act 1900 (NSW), the Bankruptcy Act 1966 and AFSA's own guidance are the primary sources behind what is set out above. Every application is subject to assessment and approval.

Reviewed by Paul Stone, Joint Chief Executive