Reading a term sheet and letter of offer

The first written proposal from a property lender rarely looks like a contract. It may be called a term sheet, indicative terms, heads of terms or an indicative offer, and it is often only a few pages long. Later, if the lender proceeds, a letter of offer and then the full loan documents follow. This lesson is a plain-language walk through those papers: what each one generally means, which parts can bind you, and the clauses worth slowing down for.

Nothing here replaces advice from a lawyer who has read your documents. The aim is to help you ask sharper questions.

Term sheets versus letters of offer

A term sheet usually arrives early, sometimes before the lender has valued the property or finished checking the borrower. It summarises the deal the lender is prepared to consider: the amount, security, term, pricing, fees and main conditions. It is generally expressed to be indicative and not a commitment to lend.

A letter of offer normally comes after the lender's credit decision. It is more detailed, may still be conditional, and once you accept it, the lender's lawyers prepare the loan agreement, mortgage and any personal guarantees. Some lenders skip the term sheet stage; others call their term sheet a conditional offer. Because naming is inconsistent, read what the document says about its own status rather than relying on the heading.

Indicative versus binding terms

Look for qualifying phrases such as "indicative", "subject to credit", "subject to valuation", "subject to due diligence" or "subject to documentation". Each one tells you the lender can still change the terms or walk away. A lower valuation, a gap in your paperwork or a change in the lender's own funding can all alter the final offer.

At the same time, signing a term sheet can create obligations for you. Clauses that commonly bind the borrower on signature include:

• a commitment or application fee, often stated as non-refundable;
• an undertaking to pay the lender's valuation and legal costs whether or not the loan settles;
• an exclusivity period during which you agree not to seek finance elsewhere;
• confidentiality about the terms.

Before signing anything, ask which clauses take effect immediately and what you would owe if the loan never funds. If you are collecting proposals from more than one lender at once, an exclusivity clause may prevent that, so raise it before you sign rather than after.

The core commercial terms

Read the commercial terms as a set, because they interact.

• Parties and security. Who is the borrower, who are the guarantors, which properties are mortgaged, and in what ranking?
• Facility limit. How was the amount sized, and against which value? A limit tied to a valuation or to project cost can shrink if either changes. The LVR and loan-to-cost tool shows how those ratios move.
• Net advance. How much actually reaches you after fees, retained interest and payouts are deducted?
• Term and expiry. When does the loan start and end, and is any extension option written in?
• Interest. What is the rate, is it fixed or variable, and is interest paid monthly, capitalised or prepaid? Is there a minimum interest period if you repay early?

The interest structures and fees lesson explains each pricing method in more detail.

Fees

Short-term loans often carry several fees, and the headline rate can hide them. Common items include an establishment fee, a line fee on undrawn amounts, valuation and legal fees, broker fees, discharge fees, extension fees and an exit fee. Note for each whether it is deducted from the advance or paid separately, and whether it applies if the loan does not proceed.

Enter the fees from each offer into the loan cost estimator, save each one, and view them together on the compare your offers page. That page only shows the terms you enter; it does not rank lenders or offers.

Conditions precedent

Conditions precedent, often shortened to CPs, are what must be satisfied before the lender is obliged to advance funds. Typical examples are a valuation satisfactory to the lender, title and company searches, insurance with the lender noted, executed security documents, legal advice certificates for guarantors, evidence of your equity contribution and payout figures for any existing loan. Construction loans add items such as a fixed-price building contract, a quantity surveyor's report and, sometimes, a level of pre-sales.

Two details deserve attention. First, many conditions are to be satisfied "to the lender's satisfaction", which leaves the lender a discretion. Second, staged loans usually carry conditions to each drawdown, so a later draw can be withheld even after the first has been paid. Ask which conditions are within your control and how long the list usually takes to clear. If you are working towards a fixed settlement date, map the conditions against it, because an unmet condition on the day can delay settlement.

Default clauses

The events of default list what counts as a breach. Expect non-payment, breach of any obligation, insolvency, false or misleading information, failure to repay at expiry and, often, cross-default, where a default on another facility counts as a default on this one. Some documents include a material adverse change clause that is broadly worded.

Then read the consequences: default interest, the lender's right to demand immediate repayment, enforcement costs passed to you and, ultimately, the right to sell the security. Check whether you receive notice and a chance to remedy before the lender acts. The default and enforcement lesson outlines how that process generally runs.

Review events

Review events are easy to overlook because they are not defaults. They give the lender a right to reassess the loan if certain things happen, such as a change in control of the borrower, a fall in the property's value, a covenant ratio being missed, a key tenant leaving or a change in law. After a review, the lender may ask for more security, a higher rate or a reduction in the debt, and some documents allow it to require full repayment within a set notice period. Ask how often review events have been called on loans like yours and what the notice period is.

Other clauses worth reading

• Assignment: whether the lender can transfer or sell the loan, and whether your consent is needed.
• Increased costs: whether the lender can pass on changes in its own funding costs.
• Representations and undertakings: the promises you make about your affairs, and the reporting you must provide during the loan.
• Personal guarantee scope: whether each guarantor's liability is limited or unlimited, and whether it extends to other debts.

A worked description

Picture two hypothetical term sheets for the same refinance. The first quotes a lower rate but deducts a sizeable establishment fee from the advance and sets a minimum interest period. The second quotes a higher rate with fewer fees and no minimum period. On rate alone, the first looks cheaper. Once both are entered into the cost estimator over the realistic term, including the risk that you repay early, the gap may narrow or reverse. The exercise is about the full picture, not the headline.

Common mistakes

• Treating an indicative term sheet as a promise to lend.
• Paying a non-refundable fee before understanding the conditions.
• Looking at the gross facility limit rather than the net advance.
• Skimming review events because they are not called defaults.
• Signing without legal advice on the personal guarantee and enforcement clauses.

What to ask before signing

1. Which clauses bind me on signing, and what do I owe if the loan does not proceed?
2. How much will I actually receive after all deductions?
3. Which conditions precedent are outside my control?
4. What are the events of default, and do I get notice and time to remedy?
5. What review events apply, and what can the lender require afterwards?
6. Can the loan be assigned without my consent?

The term sheet comparison checklist lists the items to record from each offer so you can set them side by side.