Term sheet fees and default clauses explained

What a term sheet does

A term sheet, or indicative offer, is usually the first written document a private lender gives you. It sets out the proposed loan amount, security, term, interest rate, fees and key conditions. It is normally subject to further steps, such as valuation, credit approval and legal due diligence, before the lender commits to fund. Our lesson on reading a term sheet walks through the layout; this article focuses on costs and default terms.

The term sheet matters because the final loan documents usually follow it closely. Once you have accepted it, and perhaps paid a fee, it can be harder to negotiate changes. Read it carefully at the start.

Interest

The interest rate may be fixed or variable, charged monthly in arrears, capitalised to the loan or prepaid at settlement from the loan amount. Prepaid or capitalised interest means you borrow more to cover the interest, which increases the total cost. Our lesson on interest structures and fees explains each option.

Check the following:

• whether the rate is expressed per month or per year;
• how interest is calculated, daily or monthly;
• what happens to prepaid interest if you repay early;
• whether a minimum interest period applies.

Common fees

Private loans often carry several fees in addition to interest. Not every loan has every fee, and names differ between lenders.

Establishment or application fee. Charged when the loan is set up, usually as a percentage of the loan amount, often deducted from the advance.

Commitment or due diligence fee. Paid when you accept the term sheet, sometimes non-refundable even if the loan does not proceed.

Line fee. Charged on the full facility limit, whether or not you have drawn it, common on construction loans.

Broker fee. Payable to a broker, sometimes deducted from the loan. Ask whether the lender also pays the broker and how much.

Legal and valuation costs. You typically pay the lender's legal costs and the valuation, even if the lender appoints the valuer.

Monitoring and quantity surveyor fees. Construction loans often charge for progress inspections and reports.

Exit or discharge fee. Charged when the loan is repaid.

Early repayment fee. Charged if you repay before a set date, or a minimum interest amount may apply.

Extension fee. Charged if the loan is extended beyond its original term.

Ask the lender or broker to express every fee in dollars for your loan amount and expected term. Our cost estimator helps you add them up using your own figures.

Default events

A default event is something that allows the lender to take action, such as demanding repayment or charging default interest. Common default events include:

• missing a payment of interest or principal;
• failing to repay at maturity;
• breaching a covenant, such as land tax payment, insurance or reporting;
• a material change in the borrower's position, such as insolvency;
• construction delays beyond a set point;
• a fall in the security's value below a set level.

Some documents also contain broad default events that are triggered by any change the lender considers material. Ask your lawyer to explain how wide each trigger is and whether there is a grace period to fix a problem.

Default interest and enforcement costs

When a default occurs, the lender may charge default interest, usually a margin added to the normal rate, on the whole balance. It may also recover enforcement costs, such as legal fees, receivers' fees and the cost of selling the property. These can quickly increase the debt. Our lesson on default and enforcement explains the process.

Because many private loans are short term, failing to repay at maturity is a common way borrowers end up in default. A realistic exit plan is the strongest protection. See our article on exit strategies.

Security and guarantees

The term sheet will list the security the lender requires, such as a first or second mortgage, a caveat, a general security agreement over company assets and personal guarantees from directors. Personal guarantees mean the lender can pursue you personally if the security does not cover the debt. Our guide to caveat and second mortgage registration explains the property security side.

Questions to ask before signing

• Which parts of this term sheet are binding, and which fees are payable if the loan does not proceed?
• What is the total cost in dollars, including all fees, for the expected term?
• When does default interest apply, and on what balance?
• Is there a grace period for a missed payment or covenant breach?
• What happens if the exit is delayed? Is an extension available and at what cost?
• Who appoints the valuer and who pays?
• Which complaints scheme does the lender belong to?

For help checking the lender itself, see our ASIC registers guide, and for complaints, our guide to AFCA for borrowers.

Comparing two term sheets

When you have more than one offer, put them side by side using the same loan amount and term. Add every fee in dollars, include interest for the realistic term rather than the minimum, and note differences in security, guarantees and default triggers. A lower rate with higher fees, wider default events or tougher guarantees may cost more overall. Our term sheet comparison checklist gives you a simple layout.

A worked example

Sam is comparing two term sheets for a short-term loan secured over a commercial property. The first has a lower interest rate but charges an establishment fee, a line fee on the full limit, a monitoring fee, an exit fee and a minimum interest period. The second has a higher rate, a smaller establishment fee and no exit fee. Sam asks both lenders to express every fee in dollars for the loan amount and a realistic term, including a possible extension. When the numbers are laid out, the second offer costs less over the expected term, even though its headline rate is higher. Sam also notices that the first term sheet treats any material change as a default event, while the second gives a grace period to fix a covenant breach. That difference matters as much as the price.

Negotiating the term sheet

Many terms can be discussed before you accept. Borrowers commonly ask lenders to reduce or remove exit fees, shorten minimum interest periods, add grace periods for covenant breaches, narrow broad default events or agree extension terms in advance. Lenders may not agree, but asking at the term sheet stage is easier than trying to change the final documents. Keep any agreed changes in writing.

Getting legal advice

A lawyer can explain how each clause works, whether it is unusually broad and how it interacts with your personal guarantee. For larger loans, the lender may require a certificate that you received legal advice before signing. Treat this as a genuine review, not a formality, and allow time for it in your settlement plan.

Keep a fee register

Once the loan settles, keep a simple register of every fee charged, with the date and the clause that allows it. Compare it with each statement. If a charge appears that you cannot match to the documents, ask the lender in writing to explain it.

Further reading

• Bridging finance
• Short-term property finance
• Australia's private credit market