1. What stops a short term caveat loan from getting approved? A short term caveat loan is very simple. Unlike a home loan, there are only 4 things that can stop a short term caveat loan application from settling.
Firstly the BUSINESS PURPOSE needs to be genuine. If the client doesn’t have a genuine business purpose, we cannot fund the loan, regardless of how much equity they may have.
Secondly, PROPERTY VALUE. This is a common reason for many home loans not proceeding. At HomeSec we don’t do sworn valuations, however we do still have to assess the property value. So it is important that the applicant has a good idea of the realistic value of their real estate assets. Most short term lenders will only lend to 70% – 75% LVR.
Third is DEBT LEVEL is critical. Many applicants don’t realise their overdraft and some other finance facilities may be secured by their real estate assets. This then shows an increased debt level, and blow the LVR sky high.
Fourth is EXIT STRATEGY. Short term caveat loans are and emergency funding facility and are only for a short period of time. Therefore there must be a viable exit strategy. It doesn’t mean the exit has to be in place, but the genuine intension has to be there along with the ability to deliver. Most Caveat Lenders don’t require financials, and credit history is irrelevant.
2. How regulation will affect/ change the sector in 2010, and what brokers should do now to prepare for it?
Brokers need to widen their knowledge base to be able to offer their clients SOLUTIONS…. And not just a loan. Under the new laws, brokers will need to be across all loan types, so as to best get a square peg in a square hole. This includes short term loans. If a client comes to a broker and urgently needs $200000 in a day or so to buy more stock, offering them a refinance or personal loan is not delivering the service expected of a finance broker. It would be like going to a GP with a swollen knee and being offered cough syrup.
3. Common pitfalls: when is a short term loan the correct solution for a borrower – and when is it not?
These loans are a life line to business people. Without them their business could fail, or they could miss great opportunities. It is a common misperception that these loans are only for desperate people who’s businesses are going down the drain. THIS IS NOT THE CASE. Many borrowers are very successful and want to use the equity in their real estate to urgently borrow money to make money. As these loans are strictly for business use only, borrowers do a simple Cost/Benefit analysis. If the benefit outweighs the cost, then it is a no-brainer… go for the loan! If the cost outweighs the benefit, don’t take out the short term loan. It’s really that simple.
4. Collateral security – what is acceptable and what is not?
Any piece of real estate security with suitable equity is acceptable. However LVR’s may vary depending on the type and location. For example, we can lend to 75% on established residential security, 70% on commercial security, and 50% on rural security. Some specialised security may not be acceptable, such as contaminated sites (eg: petrol stations, etc)