What To Check In A Loan Or Mortgage Agreement Before You Sign

Signing a loan agreement is not like signing up for a streaming service. The consequences of missing a clause, misunderstanding a rate, or not noticing a fee can follow you for decades. Yet most people spend less time reading their loan documents than they do reading restaurant reviews. The lender's solicitor drafted every word of that agreement. It protects the lender. Understanding it is your job. Here is what to look for — whether you are taking out a personal loan, a business loan, or a home mortgage.

The Basic Structure Of A Loan Agreement

Before getting into specific clauses, understand what you are looking at. A loan agreement typically contains:

Loan Details — the principal amount, interest rate, and repayment term Repayment Schedule — when and how much you pay each period Security / Collateral — what the lender can claim if you default Fees and Charges — what it costs beyond the interest rate Default Provisions — what triggers default and what happens next Special Conditions — anything unique to your situation

Mortgage agreements also include a mortgage deed (or deed of trust), which is the document that actually gives the lender a security interest in your property.

1. The Interest Rate — Fixed, Variable, Or Both?

This is the most scrutinised part of any loan, but most people only check the number and not the type. Fixed rate: Your rate stays the same for a defined period — commonly 1, 2, 3, or 5 years for mortgages. After that fixed period ends, the loan typically reverts to the lender's standard variable rate, which may be significantly higher. Variable rate: Moves with the market — usually tied to the RBA cash rate for Australian mortgages. Your repayments will change as rates move. Split rate: Part fixed, part variable. Offers some certainty while allowing you to benefit from rate drops on the variable portion. What to check in the agreement:

What is the comparison rate (not just the advertised rate)? The comparison rate includes fees and gives a more accurate picture of the true cost. For fixed rates: what does the loan revert to after the fixed period? Is it the standard variable rate or a discounted rate? For variable rates: is there a rate cap or floor? Some agreements include provisions that limit how much the rate can move in a given period. What is the rate adjustment notice period — how much warning will you get before a variable rate changes?

2. Repayment Schedule — Principal And Interest vs Interest Only

Principal and interest (P&I): Each payment reduces your loan balance while covering interest. This is the standard structure for most home loans. Interest only: You pay only the interest for a set period (commonly 1-5 years), then switch to principal and interest. Your balance does not reduce during the interest-only period. Common in investment property loans. What to check:

What is the exact repayment amount per period? When do repayments begin — immediately or after a grace period? For interest-only loans: what do repayments look like when they switch to P&I? Run the numbers. They will be significantly higher. Is there an offset account or redraw facility? How do these affect your repayments? What happens if you miss a payment? Is there an automatic grace period before a default is triggered?

3. Fees — The True Cost Is Not Just The Interest Rate

Loan fees are one of the most common sources of unpleasant surprises. They are usually disclosed, but spread across different parts of the agreement in ways that obscure the total picture. Fees to specifically look for: Establishment/application fee: Charged upfront to set up the loan. Can range from a few hundred to several thousand dollars. Ongoing monthly/annual fee: Some loans charge a monthly account-keeping fee. Small individually, significant over a 25-year mortgage. Valuation fee: For mortgages, the lender will value your property at your expense. Lenders Mortgage Insurance (LMI): Applies when your deposit is less than 20% of the property value. This protects the lender, not you, but you pay for it. Can be tens of thousands of dollars. Early repayment / break fee: If you pay out a fixed-rate loan early, you may owe a break cost based on the lender's loss from re-lending at a lower rate. These can be very large. Discharge fee: Charged when you pay off the loan in full and the mortgage is released. Typically $150-$400 but worth knowing about. Redraw fee: Some lenders charge to access funds you have paid ahead.

4. Prepayment And Early Repayment Terms

One of the most financially significant clauses that most borrowers do not read carefully. For variable rate loans: Generally you can make extra repayments freely, which can save significant interest over the life of the loan. For fixed rate loans: Extra repayments are usually limited — commonly $10,000-$30,000 per year in Australia. Exceeding this limit may trigger a fee. Paying out the loan entirely during a fixed period attracts a break cost calculated by a formula that can produce very large numbers when rates have moved. What to check:

What is the annual extra repayment limit during a fixed period?

How is the break cost calculated? Ask for an example calculation using a realistic rate movement scenario. Can you make lump sum payments without penalty on variable rate portions? Is there a redraw facility, and what are the conditions for accessing it?

5. Security And Collateral — What Can They Take?

For secured loans, the agreement will specify exactly what the lender can claim if you default. For mortgages: The security is the property. If you default, the lender can take possession and sell the property to recover the debt. For personal loans: Security might include a vehicle, equipment, or other assets. Cross-collateralisation: One of the most important concepts to understand if you have multiple loans with the same lender. Cross-collateralisation means the lender uses one property as security for multiple loans. If one loan defaults, the lender can move against all the secured properties. This can significantly complicate refinancing or selling individual properties later. What to check:

What specific assets are listed as security? Is there cross-collateralisation across multiple properties or loans? Under what circumstances can the lender take possession? What happens to surplus funds if the lender sells the security and recovers more than the outstanding debt?

6. Default Clauses — When Does Default Occur?

Most borrowers assume default means missing several consecutive payments. In some loan agreements, it can be triggered much sooner. Common default triggers:

Missing one payment (some agreements have a grace period, others do not)

Breaching any other clause in the agreement — including insurance requirements, maintenance obligations, or occupancy conditions for mortgages Providing false information in the application Insolvency or bankruptcy A material adverse change — vague wording that can be interpreted broadly

What happens upon default:

The lender issues a default notice (typically with a 30-day cure period under the National Credit Code for regulated loans in Australia) If the default is not remedied, the lender can demand immediate repayment of the full outstanding balance For secured loans, enforcement action (repossession/sale) follows

What to check:

How many missed payments trigger default? Is there a cure period, and how long is it? What other events beyond payment default trigger a default? Is this loan regulated under the National Credit Code? Consumer loans to individuals in Australia for personal, domestic, or household purposes typically are, which provides significant protections.

7. Guarantor Provisions — Read These Very Carefully

If someone is guaranteeing your loan, or you are being asked to guarantee someone else's, this section requires more attention than any other part of the agreement. What a guarantee means: The guarantor agrees to repay the full loan if the primary borrower defaults. This is not a formality — lenders enforce guarantees. Key clauses to check:

Is it a limited guarantee (for a specific amount) or an unlimited guarantee (for any amount owed under the agreement)?

Does the guarantee survive the death of the guarantor? Can it be called against their estate?

Under what circumstances can the guarantor be released from the guarantee? Has the guarantor received independent legal advice? In Australia, lenders are required to take steps to ensure guarantors understand what they are signing.

If you are being asked to sign as a guarantor, get independent legal advice. The guarantor obligations in most loan agreements are far more extensive than most people realise until it is too late.

8. Insurance Requirements

Most mortgage agreements require the borrower to maintain adequate building insurance on the property for the life of the loan — and often specify that the lender must be noted as an interested party on the policy. What to check:

What insurance is required under the agreement? Who specifies the minimum coverage amount? What happens if your insurance lapses — is this a default event? Are there requirements around who the insurer must be?

A Checklist For Your Next Loan Document

Before you sign any loan agreement, confirm you can answer these questions:

What is the comparison rate (not just the advertised rate)? What are all the fees — upfront, ongoing, and exit? What does the loan revert to after any fixed period ends? What are the extra repayment limits and break cost formula? What specific assets are listed as security, and is there cross-collateralisation? What triggers default, and what is the cure period? If there is a guarantor, do they understand the full extent of their obligations? Is this loan regulated under the National Credit Code?

The Bottom Line

Loan agreements are long for a reason — they cover every scenario the lender's lawyers could think of, almost always in the lender's favour. That does not make them unfair, but it does mean the responsibility for understanding what you are signing sits entirely with you. The clauses most borrowers skip — break costs, cross-collateralisation, unlimited guarantee provisions, and default triggers — are precisely the ones that cause the most financial damage. If you have a loan or mortgage agreement you want to understand before signing, upload it to GetPlainDoc. You will get a plain-language breakdown of every significant clause, red flags identified by severity, and key terms extracted so you can see the full picture at a glance.

GetPlainDoc provides document analysis for informational purposes only. This article does not constitute financial or legal advice. For significant financial commitments, consult a qualified financial adviser or solicitor.