As a young adult it can often be tough to navigate your way through financial products as they become more prominent in your life and in turn more daunting.
Whether you’re a first home buyer, a fresh credit card customer or an aspiring savings superstar, chances are there are some new words and terms that you may have seen once or twice or even not have come across yet at all.
To make things a little easier, we’ve put together a millennial’s go-to financial ‘little black book’, packed with a bunch of definitions you can call on as you dig deeper into the world of personal finance.
Base rate/Standard rate: The interest rate a savings account comes with (without spending or depositing conditions).
Bonus rate: An additional interest rate on top of the base rate that generally comes with conditions, such as deposit requirements each month or spending restrictions/conditions.
Introductory rate: An interest rate offered to customers when they first open an account that only lasts for a specific period of time (usually for the first few months). The rate will then revert to the base rate for as long as you hold the account.
Term: The length of time you allocate to have your funds locked away and accruing interest. (These often range from a month to five years).
Maturity: When your selected term is up. This may be when you receive the interest that you made on your deposited amount.
Automatic rollover: A term deposit feature where, at the time of maturity, your deposited amount automatically gets rolled over into another term of the same length. Remember, interest rates aren’t always the same between original and rolled over terms.
Purchase rate: The interest rate that is applied to regular purchases you make on your credit card.
Cash advance rate: The interest rate that is charged when you take out cash or a cash equivalent using your credit card (it is generally higher than the purchase rate).
Minimum repayments: Lowest amount you are required to pay on your credit card month-to-month to avoid being charged late payment fees.
Balance transfer: When you transfer your existing credit card debt to a card where the new interest rate on your transferred balance will either be 0% or a special low rate for a limited time (ranging from six months to 26 months).This can save you money but if you can't pay off the balance in time it might actually cost more.
Interest-free days: A feature offered on new credit card purchases (generally up to 55 days). When you buy something using your card, you have a set number of days before you are charged interest on that transaction. Keep in mind, you do not receive interest-free days on cash advances or purchases during a balance transfer offer.
Credit score: A number (ranging from zero to 1,000 or 1,200) which lenders use to determine how good of a borrower you are. It is based on your credit report which includes what type of credit products you have ever used, your repayment history, any defaults on bills, credit cards or loans, credit applications, as well as any history of bankruptcy and/or debt agreements. The higher your credit score the less risky you are to potential lenders.
Chapter 3: Loans
Variable rate: An interest rate that moves with the market, which is determined by the official cash rate of the Reserve Bank of Australia (RBA).
Fixed rate: A rate that is locked in for a certain period of time. It protects borrowers from fluctuation in the market.
Revert rate: The rate that you receive after your fixed term is up. It is usually higher than the fixed rate and is a variable rate, so is subject to change as the market changes.
Comparison rate: A rate that is used when comparing loan products. Unlike the standard variable rate, it’s calculated to include the cost of fees and charges that can affect the overall cost of the loan.
Owner occupier: A borrower, where the house they are buying is their primary place of residence.
Principal & Interest: When a borrower’s repayments are contributing to both the principal (the amount you borrowed for the loan) and the interest that is calculated on the principal amount.
Interest Only: When a borrower’s repayments are only covering the interest that is being charged on the loan, making monthly repayments lower. Once the interest only period is over, borrowers either have to pay the principal amount in full or can revert to principal and interest repayments.
Loan to value ratio (LVR): the ratio of the amount that you borrow, to the amount the property is worth. For example, if you purchase a property worth $500,000 and you borrow $300,000 from the bank, your LVR is 60% because that’s how much you are taking from the bank. It’s important to note that loans with an LVR greater than 80%, borrowers are usually required to pay for lenders mortgage insurance.
Lenders Mortgage Insurance (LMI): an insurance that borrowers pay if they have a deposit lower than 20% of the value of the property they wish to buy. LMI protects the lender in case you default on the loan, not the borrower.
Mortgage Protection Insurance: insurance that borrowers have the option to take out in case they are unable to make repayments due to illness, job loss or even death.
Offset account: A transaction account that is linked to your mortgage to offset the interest that is payable on your home loan. For example, a borrower with a $300,000 home loan and $30,000 sitting in a 100% offset account will only pay interest on $270,000. These accounts operate as a regular bank account, you can make transactions, deposits and even EFTPOS purchases.
Extra repayments feature: A home loan feature that allows borrowers to make additional contributions to their loans on top of their regular monthly repayments. In some cases, these are unlimited and in others they are capped to a certain amount per year.
Redraw facility: A home loan feature which allows borrowers to redraw any extra repayments they have made on their mortgage. Remember, you cannot use a redraw facility to access funds that are made up of your regular monthly repayments.
Premium: The cost of your insurance policy. Often you can opt to pay weekly, fortnightly, monthly and even annual premiums depending on your insurer. By paying your premiums your insurer will cover you for any instances that fall under your policy.
Excess: The amount of money you need to pay before your insurer covers any other costs, such as medical expenses, car damage or travel incidents. Your excess is stated on your insurance policy and in most cases you can negotiate a cheaper insurance premium if you accept paying a higher excess.