Caveat vs second mortgage: legal differences

The Torrens title background

Most land in Australia is registered under the Torrens system. Each state and territory keeps a register of land titles, and interests such as mortgages are recorded on the title. Registration gives certainty: anyone searching the title can see who owns the land and which registered interests affect it. Our lesson on security types explains the main forms of property security.

Two ways a private lender can protect itself are by lodging a caveat or by registering a mortgage. They are often used for short-term loans secured behind an existing first mortgage, but they are legally different.

What a caveat is

A caveat is a notice lodged on the title by someone who claims an interest in the land. It warns anyone searching the title of that claim and, in general, prevents the registration of later dealings that would affect the claimed interest without the caveator being notified or consenting. A caveat does not itself create an interest; the caveator must have an underlying interest, such as one granted in a loan agreement or an equitable mortgage.

In a caveat loan, the borrower signs a loan agreement that grants the lender an interest in the property, and the lender lodges a caveat to protect it. Because the lender does not need to register a mortgage, the loan can often be set up quickly, and it may not need the first mortgagee's documents.

Lapsing and removal

Each state has procedures for a caveat to be challenged or to lapse. For example, an owner may be able to serve a notice requiring the caveator to take court action within a set period, otherwise the caveat lapses. The steps, names of notices and time limits differ between states. Our state pages, such as caveat loans in NSW, Victoria and Queensland, link to the relevant land titles office.

What a registered second mortgage is

A registered second mortgage is a mortgage recorded on the title behind the first mortgage. It gives the second mortgagee a registered interest and, under state legislation, statutory powers on default, such as the power to sell after giving the required notices. When the property is sold, the first mortgagee is paid first, then the second mortgagee, subject to any statutory charges.

Registering a second mortgage usually requires the first mortgagee's consent, because most first mortgage documents prohibit further security without it. Getting that consent can take time and may involve the first lender reviewing the second loan. Our page on second mortgage loans explains when they are used.

Key differences side by side

Nature of the security. A caveat protects a claimed interest; a registered mortgage is a registered interest with statutory powers.

Speed. Caveat loans can often settle faster because they do not need registration through the first mortgagee.

Enforcement. A registered mortgagee has direct statutory powers of sale on default. A caveat lender may need to rely on contractual rights or a court order to enforce, which can take longer.

Priority. A registered second mortgage ranks behind the first mortgage. A caveat lender's position depends on when the caveat was lodged and on the nature of its interest. Statutory charges such as land tax can also affect priority; see land tax charges and mortgage priority.

Cost. Caveat loans are commonly priced higher, reflecting the lender's weaker position and short term.

First lender consent. Second mortgages usually need it. Caveat loans may still breach the first mortgage terms if they are lodged without consent.

How each state handles them

Land titles offices administer the rules for caveats and mortgages in each jurisdiction:

• NSW Land Registry Services and Revenue NSW guidance
• Land Use Victoria
• Titles Queensland through the Queensland Government
• Landgate in Western Australia
• Land Services SA through the SA Government
• Land Titles Office Tasmania
• ACT Land Titles
• NT Land Titles Office

Only government links are used here; some titles services are run by private operators under government arrangements, so start from the official government page for your state.

Risks for borrowers

Both structures carry risks. Short terms and high costs mean a delay in refinancing or sale can push you into default. A caveat on your title can make it harder to sell or refinance until it is removed. A second mortgage default can lead to enforcement even if the first mortgage is up to date. Read our guide to term sheet fees and default clauses and plan your exit before you sign.

Always check the lender's identity using our ASIC registers guide, and be wary of anyone asking for upfront fees before a caveat or mortgage is documented.

Questions for your lawyer

• Does my first mortgage allow further security, and do I need consent?
• What interest will the caveat protect, and what documents create it?
• What powers will the lender have if I default?
• How will the caveat or second mortgage be removed when I repay?
• How would land tax or other charges affect priority?

A worked example

Chris owns a home with a bank first mortgage and needs short-term funds for a business opportunity within days. A private lender offers two options. The first is a registered second mortgage, which requires the bank's consent and may take weeks. The second is a caveat loan that can settle within days, at a higher cost and with a short term. Chris's lawyer reads the bank's mortgage and finds that granting further security without consent is a default. Chris asks the bank for consent while the caveat loan is arranged, and the bank agrees to a second mortgage once it has reviewed the private lender's terms. The private lender then registers a second mortgage instead of relying on the caveat alone, giving both lenders clarity about priority.

Removing a caveat or mortgage after repayment

When you repay the loan, the lender should provide a withdrawal of caveat or a discharge of mortgage so the title is cleared. Ask in advance how long this takes, what fee is charged and who lodges the document. A caveat that remains on title after repayment can delay a later sale or refinance, so check the title after discharge to confirm it has been removed.

Unregistered mortgages and equitable interests

Some caveat loans are supported by an unregistered mortgage or a charge in the loan agreement. These create equitable interests that the caveat protects. Equitable interests can be enforced, but usually through a court process rather than the statutory powers available to a registered mortgagee. That is one reason caveat lenders price their loans higher and keep terms short. If a lender asks you to sign both a caveat authority and a mortgage that will be registered later, ask your lawyer to explain when each document will be used.

Checking the title yourself

You can order a title search through your state's land titles office or an authorised information broker. The search shows registered mortgages, caveats and other dealings. Doing this before and after a private loan helps you confirm that only the expected interests are recorded.

Further reading

• Caveat loans
• Mortgage ranking and priority
• AFCA complaints for borrowers