A couple being walked through their loan contract by their broker

Many homebuyers pay little attention to their loan contracts once the mortgage has settled. But understanding the specifics will help you avoid unwanted surprises down the track. Here’s how to decipher the small print above the dotted line.

After finding the perfect home and securing finance, reading your mortgage contract from top to tail is the last thing you might want to do.

While you will have a solicitor or a conveyancer checking the loan contract for you, you should also take time to read it yourself to ensure you fully understand what it is you are signing. Many more people are using brokers these days to get a loan, but don’t often check who the lender is. You need to check that what you have asked for in a loan has been included because if you complain to the lender, they will say that it was the broker’s responsibility to ensure all your requirements were met.

The contract
There are a number of items you can expect to find in a standard loan contract. Basically the document states that the lender will offer you a loan based on the terms and conditions as outlined in the document.

You should expect to find the amount you want to borrow, the annual percentage rate and what your monthly, fortnightly, or weekly payments will be. The document will also state the expected date that you will pay the loan off in full – usually after 25 or 30 years.

One part of the contract that needs close examination is the list of fees applicable under certain circumstances. These can be quite onerous and an area where lenders can really make up their money. Usually there will be fees payable for bank cheques received, dishonoured cheques, for requesting copies of loan documents, administration fees for discharging the mortgage, or for requesting a restructure of the loan, for example, if you decide you want a split loan facility.

Dean Gillespie, head of mortgage products, BankWest, says it is essential that first homebuyers begin their home ownership with the appropriate knowledge of their individual home loan terms and conditions.“For first homebuyers it is more about understanding what their obligations are to the bank. A lot of that concerns repayments and how they actually work. Every bank out there I am sure would be happy to sit there and explain to any potential borrower how to meet their repayments and understand their mortgage requirements,” he says.

Fees for the use of payment and redraw methods also warrant close examination.

For example, you may find that you will be charged for cash and cheque deposits to your account, for direct entry debit and credits, and for any BPAY transactions.

Note what the lender says they will do in the event there are any unpaid fees or charges. They may automatically debit them from one of your accounts without prior notice.

If after reading the loan contract you are satisfied with the conditions and want to proceed with the loan, you must sign and return it to the lender’s solicitors within 21 days of the date of the offer. Your solicitor or conveyancer should organise this for you. Legal advice can cost you anywhere between $600 and $1,600 depending on whether you opt for a solicitor or conveyancer and in which state you reside.

If the contract doesn’t meet your expectations
If there are any conditions in the contract you are unhappy with, you should discuss them with your lender. You may be able to get them to change them.

“If the borrower wanted to amend anything, the bank would have to be happy with that change, and could then go ahead and cancel the previous contract and draw up the new one,” says Gillespie.

If you feel strongly enough about the conditions but have no luck in getting them changed, you can always walk away from your loan. But remember that it will take a while to get finance approved from another lender.

Although different lenders have different policies, it’s a competitive market out there, but it’s also better to try and negotiate before you have all the completed documentation.

Parts of the contract
Although all contracts will vary slightly across lenders and borrowers, the Terms and Conditions Booklet (first of two parts) will remain the same for all mortgage holders.

This part of the contract outlines all the terms and conditions in which you are agreeing to take on your mortgage. It explains all common clauses which may apply to your mortgage, your responsibilities to service the loan, the lender’s responsibilities to you as a borrower, and it even explains how interest in calculated on your loan amount.

After reading your Terms and Conditions Booklet you can move onto reading your ‘Letter of Offer’ with a fine-tooth comb.

Commonly known as the actual ‘contract’ itself, the Letter of Offer outlines your individual mortgage agreement. It should be read along side the Terms and Conditions Booklet in order to cross-reference definitions and make notes.

Home buyers are protected by the Uniform Consumer Credit Code that outlines the requirements of the details that must be included in the loan contract.

Many of these are included in the Letter of Offer, and should include full details of the product, applicable interest rate, repayment amounts, fees and charges payable at anytime through the loan, commissions paid, and of course information on the property being used as security for the loan.

After checking that the credit provider (your lender) is correctly stated, you can begin on the details individual to your home loan.

1. Borrower – All about you
It is essential you verify that all details about yourself or other borrowers on your loan contract are 100% correct. If your name(s), address(es) and borrower(s) are not stated and spelled correctly, your contract may be legally void.

The name on the mortgage documents that the lender prepares has to match the name on the transfer that the solicitor will lodge with the Land Titles Office otherwise the mortgage contract is null and void.

2. Disclosure & Offer Lapse Dates
The ‘Disclosure Date’ on your mortgage contract is simply the date that the ‘offer’ or mortgage contract was issued to you as the borrower.

The ‘Offer Lapse Date’ is set by your bank or non-bank lender and states a time period in which the offer must be signed and returned to them. If the contract is not agreed, signed and returned by this date that particular offer of mortgage contract will expire. This can be anything from around 30–40 days.

Sometimes you and your solicitor may require a longer period of time to review the contract. Your lender should be able to grant additional time or simply re-issue your contract.

3. Financial Table
The Financial Table is a part of the contract which states all fiscal details including fees and charges. Your lender can change any part of this Financial Table at any time with written notice usually of around 30 days. Although each contract will differ from lender to lender, your Financial Table should include the following:

a. Initial checks

  • ‘Amount of Credit’: It is vital you confirm that this home loan amount is the figure that you agreed on during talks with your broker or lender. You may even wish to re-confirm the stated amount is enough to cover the cost of buying your home and that you can afford this amount.
  • ‘Annual Percentage Rate’: This states which product you have chosen and the current interest rate at which that product includes.
  • 'Repayments': It is easy to assume all the details of your loan contract are correct. When going over your contract make sure you check your budgets twice and ensure that the repayments stated in the offer are correct. Gillespie says it is important that borrowers confirm they can afford their repayments. “They don’t want to get into a loan they can’t afford and we don’t want to put them into a loan they can’t afford,” says Gillespie.
b. Fees and Charges
There are many costs that come part and parcel with buying a home. Some of these will be associated with your mortgage and will be disclosed in your contract under the ‘Fees and Charges’ section.

This section will initially seem quite ‘fee heavy’, although not all will be incurred.

Your solicitor will be able to confirm which of these fees are applicable to you now and later on in the term of your mortgage.

Some of these fees and charges include;

  • bank fees (application fee, bank cheque fee, valuation fee, loan maintenance fee)
  • government charges (mortgage registration fee, mortgage stamp duty, transfer duty (stamp duty) etc)
  • other fees and charges (any other unique fee which does not fall under bank or government fees, such as a search service fee)
  • bank discharge fees – only charged if you discharge the mortgage before a particular term has expired. This fee may include bank and legal costs of preparing the discharge and may begin from around $400, but will be ascertainable when the discharge happens
  • government discharge fees – This is payable to the bank or lender in reimbursement of Land Titles Office fees and charges if incurred by your lender

There are also fees and charges which are listed as ‘may or will become payable’ and will usually be fees associated with lender transactions and statements.

Note: you will also need to make sure you are aware of home loan portability and transfer fees if you are thinking of replacing your existing security with another or if your existing loan is to be transferred to another product – anytime within the period of your loan.

4. Purpose of the Loan
The ‘Purpose of the Loan’ simply confirms why have taken out the mortgage. This may be for an owner occupied property, an investment property, or a personal investment.

5. Commission
This section of the contract stipulates whether or not the lender received your business through a mortgage broker, and how much that broker was paid in commission.

6. Credit-Related Insurance Financed by this Product
If you have opted to pay for additional mortgage protection insurance it will be stated in this section. Mortgage protection insurance would cover your mortgage repayments for a length of time, if you could not work due to illness or injury.
7. Security
It is important that you confirm that your security is stated correctly. The security is the home you have decided to take a mortgage out against.

“This is going to determine what the bank [or lender] is going to take as the mortgage and what they could potentially repossess if the borrower can’t make their repayments,” warns Gillespie.

8. Disbursement Instructions
When you buy a home you do not pay the final balance to the vendor (owner) of the property, you “pay it to everyone that they owe money to” as Gillespie says. The ‘Disbursement Instructions’ on your loan contract will outline who is to be paid what and when.

9. Conditions Precedent
The ‘Conditions Precedent’ outlines any outstanding elements which need to be paid before confirmation of the home loan goes ahead. This might also include:

  • Guarantees to provide a certain document
  • Building a pest inspection
  • Fees and Charges

10. Special Conditions
The ‘Special Conditions’ section of your contract discloses particular clauses which are relevant to your mortgage. They will be referenced to points within the standard Terms and Conditions booklet which you are given alongside your contract.

Your First Home Owner Grant
First homebuyers be aware! Make sure you have organised your First Home Owner Grant before your loan contract is written up. It is your responsibility as a borrower to organise this and talk it through with your lender, broker and financial advisor – otherwise you will miss out on the $7,000 and possibly even your dream home!

Signing the Contract
If you are happy with how your contract appears, the only thing left now is to sign in the section below the ‘Special Conditions’. By signing the contract and sending it back to your lender you are officially and legally accepting the terms and conditions of that offer.

Make sure you have read the terms and conditions booklet and are aware of your commitments to your home loan.

Mortgage misconceptions
Even if you go through the contract with a fine-tooth comb and understand all the fees, charges, and conditions, it doesn’t mean you are fully protected. This is because of a feature known as the “unilateral variation clause”. Check the terms and conditions of your loan and you are very likely to find this clause in the fine print.

Basically this clause states that banks and finance companies can change any of the terms and conditions at any time without giving you any notice. Some of the things they are able to do is to increase the interest rate charged on your loan or even call in the loan at any time.

Experts say you really can’t do much about this clause which is basically standard in every credit contract. However, you should make sure your lender is part of an industry dispute resolution scheme as if you think your lender has done something unfair, this will assist you if you want to take action.

Top 10 tips for understanding your loan contract
1. Use a solicitor or conveyancer to go through the loan contract
2. Use a finance broker to ensure that the most appropriate product is selected for you
3. First homebuyers should complete the First Home Owner Grant application with a legal representative
4. Check that your documents have your full name & address spelt correctly
5. Check that the interest rate and product match what you have discussed with your broker/lender
6. Read the provision of mortgage document (terms and conditions booklet) for your rights under the lending contract
7. Have your insurance (buildings cover) ready – include this building insurance when handing back mortgage contract to your lender
8. Don’t leave the signing of the documents until the last minute, chances are there will be an error that will need to be corrected
9. Don’t get pressured into signing documents that are not right or are not the product you discussed, have them fixed first
10. If in doubt ask questions & ask for translations in laymen’s terms, and keep a copy of your contract for your records
*Source: Mark Mugridge, training & compliance manager, City Pacific Finance