Caveat loans with bad credit

A bank reads your credit file first and your property second. A caveat lender does it the other way round. That’s why owners who’ve been turned away by their bank because of a default or a rough patch can still find a caveat loan workable — provided the equity and the exit are sound.

Why does credit matter less for a caveat loan?

Because the loan is built on different foundations:

1. The property. A realistic value and a comfortable combined LVR give the lender a strong fallback.
2. The exit. A dated, documented way to repay — a sale, refinance or receivable — answers the “how will this be repaid?” question directly.
3. The term. Short loans with a clear end carry less risk of things changing.

Credit history still matters. It helps the lender understand how you’ve handled debt, and it can affect price and structure. But it isn’t the gatekeeper it is at a bank.

What kinds of credit problems are considered?

Credit issue	How it’s usually viewed
Paid defaults	Considered, especially with an explanation
Unpaid defaults	Considered, sometimes paid out from the loan
Late payments on existing loans	Considered; lender will want to know they’re up to date now
Arrears on the first mortgage	Considered case by case — sometimes the loan brings them up to date
ATO debt, including disclosed business tax debt	Considered; see ATO debt
Court judgments	Considered, but must be explained and often cleared
Discharged bankruptcy or ended personal insolvency agreement	Case by case
Current bankruptcy	The trustee controls the estate, so generally not possible

How long do credit problems stay on your file?

The Office of the Australian Information Commissioner (OAIC) sets out how long different information stays on a consumer credit report. Among them:

• Defaults: five years.
• Repayment history information: two years.
• Credit enquiries: five years.

You’re entitled to a free copy of your consumer credit report from each credit reporting body once every three months, and more often if you’ve been refused credit in the last 90 days. Get yours before you apply anywhere — knowing what’s on it lets you explain it before a lender asks.

Business tax debts are a separate category: the ATO can disclose business tax debt to credit reporting bureaus in certain circumstances. Our guide on ATO debt disclosure and your credit file explains when.

Worried your credit history rules you out? It usually doesn’t. Try the Feasibility Checker — it doesn’t ask about credit at all — or ask a specialist directly.

How should you explain your credit history?

Briefly, honestly and upfront. A good explanation covers:

• What happened — a failed customer, a health issue, a divorce, a COVID-era slowdown, a bad partner.
• When — so the lender can see how long ago it was.
• What changed — how the business or your situation is different now.
• What’s outstanding — any defaults or judgments still unpaid, which may be cleared from the loan.

Lenders see credit problems every day. What slows files down is discovering an issue halfway through that nobody mentioned.

What else strengthens a bad-credit application?

• A lower combined LVR. Borrowing less, or adding another property, gives the lender comfort. See how much you can borrow.
• A documented exit. A signed contract or approval matters more when the file has scars. See exit strategies.
• Clearing problems with the loan. Paying out an unpaid default or judgment as part of the loan can tidy up the file.
• Keeping the first mortgage current. Arrears there are the one issue lenders scrutinise hardest.

An illustrative example

Illustrative only.

A Launceston landscaping business owner has two paid defaults from four years ago, when a major client went into liquidation owing money. The bank declines a new equipment loan. The owner needs $120,000 to buy machinery for a council contract that starts next month. The family home is worth about $720,000 with $300,000 owing. A $130,000 caveat loan including costs brings the combined LVR to about 60%. The exit is equipment finance once the machinery is delivered and the contract’s first payment has cleared. The defaults are explained in two sentences at the start, and they don’t come up again.

Which credit issues are worth fixing before you apply?

Some problems are easier to fix than to explain. Before you enquire, it’s worth checking your consumer credit report and your business’s position for:

• Small unpaid defaults that could be paid now, so they show as paid rather than outstanding.
• Errors. Listings that aren’t yours, are duplicated or should have been removed. You can ask the credit reporting body to correct them.
• Arrears on your first mortgage. Catching up, or at least agreeing a plan with your bank, removes the issue lenders worry about most.
• Unlodged tax returns or activity statements. Getting lodgements up to date makes every conversation with the ATO, and with lenders, easier.

Don’t delay an urgent need to do all of this — a caveat loan can often be used to clear some of these items at settlement. But where a fix takes a phone call, make the call.

Been knocked back before? Try a different conversation

A declined bank application isn’t the end of the road when you have property equity and a plan.

Asking takes about 60 seconds and won’t be recorded on your credit file — no credit check at the enquiry stage. We don’t circulate your details to a string of lenders; one specialist looks at the equity, the exit and your explanation, then calls you. Please be upfront about the credit history on the form; honesty makes the first call far more productive.

See if you qualify despite past credit issues →