First mortgage, second mortgage or caveat loan: which fits?

When a business owner borrows against property, the first decision isn’t how much — it’s where the new lender will sit on the title. That position determines how quickly the loan can be set up, how much it costs, what happens to your existing bank loan, and what the lender needs from you.

There are three main options in private secured lending: a first mortgage, a second mortgage and a caveat loan. They can all be secured on the same property, but they behave very differently. This guide lays them side by side.

How do the three options compare at a glance?

	Private first mortgage	Second mortgage	Caveat loan
Position on title	Registered first	Registered behind an existing first mortgage	Caveat noted on title, not a registered mortgage
Existing bank loan	Usually paid out and replaced	Stays in place	Stays in place
Typical term	1 to 24 months	Typically shorter	Typically shorter
Relative cost	Lowest of the three	Higher — ranks behind the bank	Generally the highest
Setup speed	Fast	Fast	Usually the fastest
Best for	Unencumbered property, replacing a bank, larger or longer needs	Adding funds while keeping a good bank loan	Urgent, short, smaller needs
Can it change later?	—	—	Can be converted to a registered second mortgage

What makes a first mortgage “first”?

Priority on a land title generally follows the order of registration. Landgate’s guidance for Western Australia, for example, explains that instruments affecting the same interest have priority according to the time of registration, and that registration itself is what changes the register.

So a first mortgage is simply the mortgage registered ahead of all others. If the property is ever sold to repay debt, the first mortgagee is repaid before anyone behind it. That’s why first mortgages carry the least risk and the sharpest pricing.

A private first mortgage makes sense when:

• The property is debt-free, or the existing loan is small enough to pay out.
• You want to replace a bank that is slow, unwilling or demanding conditions you can’t meet in time.
• You need a larger amount or a longer private term — private first mortgages run for 1 to 24 months.

More on this on our private first mortgage business loans page.

How does a second mortgage work with your bank loan?

A second mortgage is registered behind the existing first mortgage. Your bank loan stays exactly as it is — same pricing, same repayments — and the private lender advances extra funds secured on the remaining equity.

The trade-off is cost. Because the second lender is repaid only after the first, it carries more risk and generally charges more than a first mortgage would. That’s still often the cheaper overall answer when your bank loan is large and well-priced: you’re only paying private pricing on the additional amount.

Two practical points:

• Your existing loan documents matter. Many first mortgages include terms about further borrowing or additional security, so your solicitor should check whether the first lender’s consent is needed.
• Equity is shared. The total debt across both mortgages is what the lender looks at.

Our page on how second mortgages rank explains priority, consent and what happens on sale in more detail.

What exactly is a caveat, and how does a caveat loan use one?

A caveat is not a mortgage. It’s a notice on the title. Land Use Victoria describes it as a document lodged by a person with an interest in a property, which then appears on the title so that anyone searching is on notice that a third party may have rights over it.

Landgate’s guidance adds two useful points. First, a caveat doesn’t create an interest by itself — it protects an interest the caveator already claims. Second, its job is to stop that interest being defeated by the registration of another dealing without the caveator first having the chance to protect its position. Titles Queensland similarly describes a caveat as preserving the status quo of the title, and notes that registering one doesn’t itself prove the claimed interest exists.

In a caveat loan, the borrower signs a loan agreement that charges the property, and the lender lodges a caveat to protect that interest. Because there’s no full mortgage to prepare and register, a caveat loan can often be put in place very quickly. It’s typically used for:

• Short, urgent needs — a deposit, an ATO deadline, a supplier payment.
• Smaller amounts, often where a bank first mortgage already exists.
• Situations where a formal second mortgage would take longer than the opportunity allows.

A caveat loan can later be converted to a registered second mortgage, which can suit a loan that runs longer than first expected. See our full explainer on caveat loans.

Which option fits which situation?

Situation	Usually the best fit	Why
Debt-free warehouse, need $1.5m for 18 months	Private first mortgage	First position, longer term available
Good bank loan on the home office, need $150k for 4 months	Second mortgage or caveat loan	Keeps the bank loan intact
ATO deadline in two days, need $90k	Caveat loan	Quickest security to put in place
Bank refusing to extend, want to consolidate everything	Private first mortgage	One loan, one exit, bank paid out
Caveat loan already in place, project running longer	Convert to registered second mortgage	More formal security for a longer loan

If you’re torn, our 60-second loan quiz narrows it down based on your answers.

Illustrative example: A Melbourne joinery business owns its factory, worth around $1.5m, with $600k owing to the bank. It needs $300k for new machinery and a large materials order.

• Option A — refinance into a private first mortgage: the bank is paid out and a new private first mortgage of $900k is registered (illustrative LVR of 60%). One lender, but the whole $900k now carries private pricing.
• Option B — second mortgage: the $600k bank loan stays put and a $300k second mortgage is registered behind it (illustrative combined LVR of 60%). Only the $300k carries private pricing.
• Option C — caveat loan: $300k is advanced against a caveat, usually fastest to set up, for a short term, with the option to convert to a registered second mortgage if the timeline stretches.

For a business with a sound, well-priced bank loan and a short need, Option B or C usually costs less overall. If the bank is the problem, Option A solves it outright. Our comparison of a second mortgage versus a full refinance works through that decision in more depth.

What happens to each lender if the property is sold?

This is where position on title stops being theory. When a property with more than one lender on it is sold, the sale proceeds are applied in order of priority.

1. Selling costs and the first mortgage come first. The first mortgagee is repaid in full before anyone further back.
2. The second mortgage is repaid next, from whatever remains.
3. Any caveat has to be resolved as well — the caveator is paid and the caveat withdrawn — because a buyer will want a clear title at settlement.
4. The balance goes to the owner.

For a borrower with a clear exit and solid equity, this order rarely matters in practice — the sale price comfortably covers everyone. But it explains why lenders further back are more careful about how much total debt sits on the property, and why they price accordingly. It also explains why a buyer’s solicitor will insist that every mortgage is discharged and every caveat withdrawn so the buyer receives a clean title.

What does each option need from you?

The paperwork is broadly similar across all three, but there are differences worth knowing before you choose.

	Private first mortgage	Second mortgage	Caveat loan
ID for all owners and guarantors	Yes	Yes	Yes
Payout figure from existing lender	Yes, if refinancing	No — the bank stays	No — the bank stays
Current statement from existing lender	If refinancing	Yes, to confirm what’s owing ahead	Yes, to confirm what’s owing ahead
Review of existing loan terms	Not usually	Yes, for any consent requirements	Yes
Evidence of exit	Yes	Yes	Yes — usually a short, clear one

Whichever route you take, there’s no formal valuation required — the property is assessed directly, which keeps all three options quick. Our document checklist covers each item in detail.

How do you work out how much equity is available?

Whichever structure you choose, the lender looks at the total debt secured on the property against what the property is worth. A second mortgage or caveat simply adds to the debt already there. Our equity calculator lets you enter one or more properties, what’s owing on each, and see the usable equity for a first versus second mortgage.

Not sure which structure to use? Let a specialist look

You don’t have to choose before you enquire. Tell us about the property, what’s owing on it and what you need, and a specialist will tell you which position on title makes the most sense — and why.

Make a quick enquiry — there’s no credit check to ask the question, your details aren’t shopped around to other lenders, and a real person reviews the deal. The more precisely you describe the property and every loan already registered on it, the more reliable the first answer will be. See whether your deal qualifies.