How to Read a Loan Contract Without a Law Degree

Loan contracts are dense, jargon-heavy documents that most borrowers sign without fully reading. That's risky. You don't need to understand every clause, but you do need to know which sections matter and what to watch out for. Here's your practical guide.

Interest rate type and comparison rate

• Interest rate type: Confirm whether your loan is fixed, variable, or split. This should match exactly what you discussed with your broker. If it says "variable" and you expected "fixed for 3 years," stop and clarify before signing.
• Comparison rate: This is the effective annual rate including standard fees and charges. By law, lenders must display it alongside the headline rate. If the headline rate is 5.99% but the comparison rate is 6.45%, the difference reveals hidden costs.
• Rate type at expiry: For fixed loans, check what rate you revert to when the fixed period ends. Some lenders revert to a higher "standard variable rate" rather than their best variable rate. Ask your broker to confirm the revert rate and whether it's negotiable.

Fees schedule: the hidden costs

• Application/establishment fee: Usually $200–$600. Some lenders waive this for refinancers or during promotional periods.
• Annual/monthly fee: Some loan packages charge $300–$400 per year for features like rate discounts and offset accounts. Calculate whether the rate discount actually saves you more than the fee costs.
• Valuation fee: Charged for the lender's property valuation. Ranges from $0 to $600. Often waived on the first valuation.
• Discharge/settlement fee: The cost to close the loan when you sell or refinance. Typically $150–$400 but can be higher.
• Late payment fee: What you'll be charged if a repayment bounces or is missed. Usually $15–$25 per occurrence.

Offset and redraw facilities

• Offset account: Check whether a full offset is included or whether it's partial. A full 100% offset means every dollar in the linked account reduces the interest you're charged dollar-for-dollar. A partial offset only reduces interest on a portion.
• Number of offsets: Some lenders allow multiple offset accounts linked to one loan. This is useful for separating savings, tax, and personal funds while all reducing your interest.
• Redraw facility: If you make extra repayments, can you redraw them? Some loans restrict redraw amounts or charge fees for each withdrawal. For investment loans, be cautious — redrawing for personal expenses can muddy your loan's tax-deductible purpose.
• Offset on fixed loans: Most fixed-rate loans do not include a true offset account. If this feature is important to you, check carefully before committing to a fixed rate.

Break costs and early repayment terms

• Break costs (fixed loans): This is the fee for exiting a fixed-rate loan early — by selling, refinancing, or paying it off. Break costs can be substantial, sometimes $10,000–$50,000+, depending on the loan size, remaining term, and how far rates have moved since you fixed.
• How they're calculated: The contract should describe the formula, but it's often opaque. In general, if market rates have fallen since you fixed, your break costs will be higher (because the lender is losing the premium you locked in).
• Early repayment fee (variable loans): Most variable loans have no early repayment penalty, but some low-rate or basic variable products do. Confirm this in writing.
• Extra repayment limits: Fixed loans often cap additional repayments at $10,000–$30,000 per year. Exceeding this may trigger break costs or fees.

What to watch out for

• Cross-collateralisation clauses: Check whether the lender is using other properties you own as additional security. This should be avoided unless you have a specific reason and your broker has confirmed the structure.
• Clawback clauses: Some lenders or brokers offer cashback or fee waivers that must be repaid if you refinance within a certain period (often 2–4 years).
• Guarantor obligations: If anyone is guaranteeing your loan, the contract will detail their liability. Ensure all parties understand their exposure before signing.
• Default triggers: Beyond missed payments, some contracts define default events that include changes in your financial circumstances, property damage, or even failing to maintain insurance. Know what could trigger a default notice.
• Interest rate changes: For variable loans, check whether the lender can change your rate independently of the RBA (spoiler: they can). Some lenders are more aggressive than others with out-of-cycle rate increases.

Questions to ask your broker before signing

• "What is the exact revert rate when my fixed period ends, and can it be renegotiated?"
• "Are there any clawback clauses on cashback offers or fee waivers?"
• "What are the estimated break costs if I need to exit in 12, 24, or 36 months?"
• "Is this loan cross-collateralised with any of my other properties?"
• "Can I make extra repayments on the fixed portion, and if so, how much per year?"
• "What happens to my offset account if I switch from variable to fixed in the future?"
• "Is there a discharge fee, and how long does the discharge process take?"

When to get a legal review

• Trust or company borrowers: If you're borrowing through a trust or company structure, the contract includes additional provisions that warrant legal review.
• Large or complex deals: For loans over $1M, commercial property loans, or construction finance, the terms are more nuanced and the stakes are higher.
• Guarantor involvement: If someone is guaranteeing your loan, independent legal advice for the guarantor is often required by the lender and is always a good idea.
• Anything you don't understand: If a clause confuses you and your broker can't explain it in plain language, get a property solicitor to review it. The cost ($300–$800) is trivial compared to the risk of signing something you don't understand.

Related guides

• Choosing the Right Lender Tier
• Fixed vs Variable Rates: What Investors Need to Know