AAPR stands for Average Annual Percentage Rate. It may sound like gobbledigook but is actually a handy tool that shows you the true cost of a home loan or personal loan. The AAPR takes into account introductory and ongoing interest rates, upfront fees, any ongoing fees and other factors not included in the 'headline' rate advertised by the lender.
Also known as the Comparison Rate, the AAPR helps borrowers compare loans side by side and see how fees and charges can impact the total cost of the loan. For example, a loan with a really low introductory rate for the first year might work out to be more expensive in the long run than a loan with a low ongoing rate.
You'll find the AAPR in all home loan and personal loan advertising, as lenders are legally required to disclose it. Be aware that not all loan costs are included in the AAPR, like exit fees and early termination charges. Always check the fine print for these, as they can be quite hefty.
An annual fee is a somewhat annoying maintenance fee that many credit card providers charge cardholders each year. The annual fee supposedly covers the the cost of mantaining your credit card, but depending on the type of card you have the fee can range from $20 to almost $400 a year for some of the snazzier platinum cards out there. What's more, some credit cards don't have an annual fee at all, so it pays to do your homework here.
In addition to the annual fee, some credit cards have a separate rewards program fee, which is also charged annually. If all these fees aren't enough, some banks treat annual fees like a purchase, so that if you don't pay off your credit card balance in full at the end of the month (including the annual fee), you'll be charged interest on the fee.
An application fee is charged by some lenders to cover the administration and paperwork required to set up a new home loan or personal loan. Application fees are also known as 'establishment fees' and are legally required to be disclosed upfront by lenders. Some lenders don't charge an application fee at all, while others will waive them at their own discretion.
Another increasingly common practice amongst mortgage lenders is to waive the upfront application fee and instead charge what's known as a 'deferred establishment fee' if you close your loan early, for example to switch to another provider. Deferred establishment fees can be quite substantial, so be sure to check your loan contract so there are no surprises down the track.
Automatic rollover is an optional feature offered on some term deposit accounts where your investment is automatically rolled over on maturity into another investment term. For example, if you have a six month term deposit you could opt to have your investment automatically rolled over into another six month term on maturity.
Before signing up for an automatic rollover, be sure to check the interest rate that will be paid on the rollover to ensure you are getting the best rate. Sometimes the renewal rate can be lower than market rates for other investment terms. Generally investors are not forced to accept the rollover rate and are free to choose another term at another rate.Back to top
A balance transfer is the act of transferring a debt from an existing credit or store card to a new credit card, to take advantage of a lower interest rate. Many credit cards have extremely competitive balance transfer offers. For example they might charge zero interest for the first six months on a balance you transfer from another card. Balance transfer rates are generally offered for a limited time only, so you should always check the ongoing interest rate that will apply once the balance transfer offer ends.
Another trap to watch out for is that the balance transfer rate usually only applies to the balance you transfer and not to any new purchases you make using the card. If you are planning to use the card for new spending, be aware that the interest free days will generally only be available if you repay the entire balance on the card by the due date, including the balance transfer amount. Otherwise, you will incur interest on any new purchases.
Basic rate home loans are 'no frills' loans that generally offer lower interest rates than standard variable rate home loans. The trade-off is that basic rate loans generally have less features and flexibility than standard loans. Most major bank and non-bank lenders offer a basic rate loan option. However, if you want flexible features such as an offset account, free redraw facility and the ability to make early repayments without being penalised, you may be better off with a standard variable rate loan.
Bonus rates are special interest rates offered on savings accounts that are higher than the lender's standard rates. Bonus rates are commonly offered for a limited introductory period, for example for the first six months.
Some lenders also offer bonus rates if you meet certain conditions, such as not making any withdrawals or depositing a certain amount in the account each month. If you're considering a savings account with this sort of bonus rate structure, first make sure that the conditions are realistic for your financial situation. There is often a big difference between the bonus rate and the standard rate, and not meeting the conditons could mean missing out on lots of interest.
Break costs are charged by lenders if you terminate a fixed rate home loan before the end of the fixed term. Break costs (also known as break fees) are often charged as a percentage of the original loan amount, and can be pretty hefty.
It is important to check your home loan contract before signing on the dotted line to ensure you are aware of any break costs and are unlikely to want to terminate the loan before the fixed term is up. Different lenders can define loan 'termination' as anything from switching to a variable rate loan before the fixed term is up, to making early repayments during the fixed term or switching to another lender.Back to top
Cash advance functionality is offered by most credit cards and allows you to use the card to withdraw cash via an ATM or bank branch. Cash advances may seem like a great way of getting instant access to funds in times of need, but should be avoided if at all possible as you will pay through the nose for them.
Many credit cards charge higher interest rates for cash advances than for regular purchases - over 20% in some cases. What's more, interest free days do not apply to cash advances so you will be hit with interest from the moment you use your card to withdraw cash. In addition to high cash advance rates, most credit cards also charge fees of 1% to 3% on each cash advance you make. To give you an example, this would equate to $150 to $250 in fees per $10,000 withdrawn.
A cash management account is a type of savings account that usually offers higher interest rates than a regular bank account, plus fast and easy access to your savings via ATMs, EFTPOS, internet and phone banking, and so on. Interest rates for cash management accounts are generally lower than those offered by high interest online savings accounts, although some cash management accounts offer tiered interest rates that increase as your balance grows. If you want the flexibility of being able to access your savings anytime, anywhere, then a cash management account could be right for you.
A charge card enables you to charge purchases to your card and pay them off at the end of the month. Unlike a credit card, you have to pay the balance on your charge card in full each month. Charge cards do not levy interest on purchases that are paid off at the end of the month, but if you fail to pay your monthly balance in time you will be hit with hefty late payment charges. This is generally in the form of penalty interest. In Australia, the two main issuers of charge cards are American Express and Diners Club.
Combination loans are home loans that let you have two different types of loan in one. The most common combination loans are where a portion of the loan is on a fixed rate (e.g. 20%) and the remaning portion (e.g. 80%) is on a variable rate.
These sort of combination loans are also called 'split loans' and have the benefit of offering you some protection against rising interest rates, along with the flexibility of a variable rate loan. For instance, unlike a fully fixed rate loan where extra repayments are generally not alllowed, you can make extra repayments on the variable portion of a combination loan.
Combination loans are also used to describe home equity loans where a portion of the loan is a home equity loan and the remainder is a standard home loan.
A comparison rate is a useful tool that shows you the true cost of a home loan or personal loan. Also known as an AAPR or 'Average Annual Percentage Rate', the comparison rate appears by law in all home loan and personal loan advertising to show you how fees and charges can impact the total cost of the loan.
The comparison rate takes into account introductory and ongoing interest rates, upfront fees, any ongoing fees and other factors not included in the 'headline' rates advertised by lenders. This helps you compare loans side by side, as a loan with a really low first year introductory rate might work out to be more expensive in the long run than a loan with a low ongoing rate.
Be aware that not all loan costs are included in the comparison rate, such as exit fees and early termination charges. Be sure to check your loan contract for these before you sign on the dotted line, as they can be substantial.
Credit unions are co-operative financial institutions that are owned by members and operated for the benefit of members. Because credit unions are not owned by external shareholders like the major banks are, they are not driven by the need to maximise profits. Instead, a credit union's profits are generally reinvested in services for their members, in the form of lower interest rates and fees and better customer service.
Credit unions started life in Australia as financial institutions catering to specific regions or professions, such as teachers and nurses. Over time most credit unions have opened their membership to all Australians. Their competitive products have made them an increasingly popular alternative to the banks. Becoming a credit union member is a simple process that involves purchasing a share in the credit union, usually around $10.Back to top
A debit card looks like a credit card and works everywhere you would normally use one, but only lets you spend money you actually have. A debit card is linked to your bank account so that when you make a purchase, the debit card automatically debits the money from your account.
Debit cards can be used for anything from paying a restaurant bill to shopping online, and because the funds are immediately drawn from your account you don't receive a monthly bill and there is no interest charged on purchases. Most debit cards also allow ATM and EFTPOS access.
Both Visa Debit Cards and Debit Mastercards are available in Australia. Annual fees and transaction fees vary from bank to bank so it pays to look around for the best deal.
Debt consolidation is the process of combining multiple existing debts into one loan. Debt consolidation helps you get your debt under control by making one repayment each month instead of multiple repayments for different loans.
Debt consolidation is also beneficial if you are paying high interest rates on existing loans, for example multiple credit cards or personal loans. Consolidating these debts into a single low rate loan will save you interest and help you to pay the debt off faster. If you have a home loan you can also speak to your bank about consolidating other debt into your home loan, as home loan interest rates are generally much lower than credit card and personal loan rates.
A deferred establishment fee is an increasingly common fee that is charged by mortgage lenders if you close your loan within the first few years. A deferred establishment fee might be charged for example if you repay your loan early or switch to another lender during the first four or five years of the mortgage.
According to lenders, the deferred establishment fee helps them recoup the economic losses incurred when they lose a customer in the early years of a loan. Some lenders charge deferred establishment fees of more than $1,000, so be sure to check your loan contract to avoid any nasty surprises down the track.
Deferred repayments are a feature of some personal loans, where the borrower is able to defer making repayments for a set period of time, such as three years. For instance some lenders offer student loans that let you defer repayments until your studies are over. Some home loans also offer deferred repayments for certain situations, for example if the borrower is unemployed or on maternity leave. These are also called 'repayment holidays'.
A discharge fee is a fee charged by a mortgage lender to cover the admininistration costs of closing or 'discharging' a home loan. The discharge fee (also known as an 'exit fee') is charged when a borrower pays off their mortgage, or switches to another provider. In recent years mortgage discharge fees have been increasing, as lenders seek to discourage borrowers from switching to other lenders.
In addition to the discharge fee, most lenders also charge a deferred establishment fee or early repayment fee if you pay off your loan or switch to another lender within the first few years of the loan. These fees can range from a couple of hundred dollars to thousands of dollars, so always check the fine print before you sign your mortgage contract. Lenders are legally required to disclose these fees up front.Back to top
Early termination charges are imposed by some mortgage lenders when you close a home loan in the first few years, for example if you switch to another lender, repay the loan in full or default. Also known as 'early repayment fees', early termination charges are designed to discourage borrowers from switching to other lenders and can be severe.
The worst early termination charges are those which are calculated as a percentage of the original loan amount. These are often calculated on a sliding scale, where the percentage amount drops each year. If you close one of these loans within the first couple of years you could be hit with thousands of dollars in early repayment charges, depending on your loan amount. To avoid being caught in this situation, always check your loan contract before signing on the dotted line. There are plenty of lenders out there who offer good rates without severe early termination penalties. As with everything, it pays to do your homework.
Early termination charges are not the same as discharge or exit fees. These are the standard administration fees charged by lenders to cover the cost of processing the closure of your loan.
An establishment fee is charged by some lenders to cover the administration and paperwork required to set up a new home loan or personal loan. Establishment fees are also known as 'application fees' and are legally required to be disclosed upfront by lenders. Some lenders don't charge an application fee at all, while others will waive them at their own discretion.
Another increasingly common practice amongst mortgage lenders is to waive the upfront establishment fee and instead charge what's known as a 'deferred establishment fee' if you close your loan early, for example to switch to another provider. Deferred establishment fees can be quite substantial, so be sure to check your loan contract so there are no surprises down the track.
An entry fee is a set-up fee charged by charged some lenders when you take out a personal loan. According to lenders, the entry fee covers the administration costs involved in setting up your loan. Not all personal loans have an entry fee however, so if you don't want to be hit with extra upfront costs be sure to shop around for the best deal.
An exit fee is a fee charged by lenders to cover the admininistration costs of closing a home loan or personal loan. The exit fee (also known as a "discharge fee") is charged when a borrower pays off their loan or switches to another provider. In recent years exit fees have been increasing, as lenders seek to discourage borrowers from switching to other lenders.
In addition to the discharge fee, most mortgage lenders also charge a deferred establishment fee or early repayment fee if you pay off your loan or switch to another lender within the first few years of the loan. These fees can range from a couple of hundred dollars to thousands of dollars, so always check the fine print before you sign your loan contract. Lenders are legally required to disclose these fees up front.Back to top
Fixed rate loans protect borrowers from the possibility of rising interest rates by allowing you to lock in an agreed rate for a certain period of time. Fixed rates are available on both home loans and personal loans, and can generally be arranged for one year to five years or more.
During the fixed rate term, your rate will stay the same regardless of whether variable interest rates move up or down during the period. Once the initial fixed rate term is over, borrowers have the choice of transferring to a variable rate loan or locking in another fixed rate term at the lender's current rates.
Fixed rate loans are useful for borrowers who believe that interest rates are heading upwards and want to protect themselves against increasing mortgage repayments. However, fixed rate loans are generally less flexible than variable rate loans. For example you may be penalised for making additional repayments and redraw facilities are generally not available. Fixed rate loans also often carry substantial "break costs" for terminating the loan during the fixed term, so be sure to check the fine print in your loan contract.Back to top
A home equity loan enables a borrower to access the equity in their home to finance other expenses, such as home renovations, a new car, investments or even a holiday. The most common type of home equity loan is a home equity line of credit, where the borrower has access to a ready source of funds up to an agreed limit. The borrower can access the funds as and when they are needed, and any amount repaid is available to be redrawn.
Borrowers generally need at least 20% equity in their home to be eligible for a home equity loan. Financial institutions calculate your facility limit according to a number of factors, including the appraised value of your home and the amount of equity you have built up in it.
Honeymoon rates are low introductory interest rates offered by lenders to make their home loan offers look more attractive to borrowers. Also known as an 'intro rate' a honeymoon rate typically lasts for the first six to twelve months of the loan, before reverting to a higher ongoing rate.
Wherever you see a honeymoon rate being advertised by a lender, be careful to check what rate it reverts to once the 'honeymoon' is over. Some lenders try to tempt borrowers with low intro rates only to charge high ongoing rates once the intro term is over. This can come as a shock to borrowers as loan repayments can dramatically increase once the 'honeymoon' is over. Generally speaking, most borrowers will be better off with a loan that offers a low ongoing interest rate for the life of the loan.Back to top
Many credit cards offer interest free days on new purchases. This means that if you buy something using your credit card you have a set number of days (55 days is common) before you will be charged interest on that purchase. What many cardholders don't realise is that if you carry over a balance each month, you won't earn any interest free days until it's paid off. In other words, to take advantage of your credit card's interest free days period on purchases you need to make sure that you pay off your card in full each month by the due date. This includes any balance transfer amounts.
Another trick to watch out for is that interest free days only apply to purchases, not to cash advances. If you use your credit card to withdraw cash, you will be charged interest on that amount from day one.
An interest only loan enables a borrower to pay only interest on the amount they have borrowed, instead of paying down the original loan amount as well. With an interest only loan, the original loan balance remains unchanged. Because you are not actually paying off your loan, your monthly interest payments are lower than those for principal and interest loans.
Interest only loans are usually offered for a set term, such as five years. After the interest only term ends, borrowers can pay the original loan amount in full or convert to a principle and interest loan to start paying down the loan. Interest only loans are often used to buy investment properties. The lower monthly repayments free up cash for other uses, and if the property has appreciated in value it can be sold at the end of the loan to repay the original loan amount.
Introductory rates are discounted interest rates offered by lenders for an introductory period to make their home loan offers look more attractive to borrowers. Also known as a 'honeymoon rate', an introductory rate typically lasts for the first six to twelve months of the loan, before reverting to a higher ongoing rate.
If you are considering an introductory rate loan, be careful to check what rate it reverts to once the introductory period is over. Some lenders tempt borrowers with low introductory rates only to charge high ongoing rates once the introductory term is over. This can come as a shock to borrowers as loan repayments can dramatically increase once the 'honeymoon' is over. Generally speaking, most borrowers will be better off with a loan that offers a low ongoing interest rate for the life of the loan.Back to top
Kids savings accounts are a great way to teach children the importance of saving money. Most kids savings accounts are structured like regular transaction accounts, with the benefit of no monthly fees and attractive interest rates to reward children for saving. Most can be opened in a child's name, with a parent or guardian as a trustee. Note that if your child earns more than $420 a year in interest, he or she will need to declare this as income to the Australian Tax Office.Back to top
This is a loan that enables borrowers to have access to money up to a given limit. It's almost like a giant credit card except that there are no set repayment and borrowing periods. This type of loan is good for people who are renovating a home and don't want to draw down the entire amount of a home loan. Rather, they only draw down certain amounts like $50,000 for the new kitchen, and $20,000 for the new bathroom.
The Loan to Value Ratio (LVR) is the ratio of the loan amount to the amount the property is worth, expressed as a percentage. For example, if the property value is $200,000 and you borrow $100,000, the LVR is 50%. Loans with an LVR exceeding 80% generally require mortgage insurance, as the risk of the borrower defaulting is too great for the lender.
This is where you deposit an amount of money for a certain period of time, generally any period from 12 months up to 5 years. The difference between a term deposit and a normal savings or bank account, is that you receive a higher rate of interest the longer you keep your money in the account. However, once you nominate a period of time to keep your funds in the bank, you can't access these funds until the time period runs out. If you do decide to withdraw your money early, you will face heavy early withdrawal fees.
A low-doc loan (literally "low documentation" loan) is different to a normal loan in that you aren't required to hand over as many documents to verify your income (such as pay-slips and tax returns etc.). These types of loans are normally for people who are self-employed, casual workers and people with bad credit history. Normally the interest rate is a lot higher for these loans as there is a higher risk to the lender. Similarly, fees and charges are generally higher.Back to top
These are the payments that are generally required by a credit card provider in order to avoid charging fees to the credit card holder. By paying the minimum repayment, you are able to keep the credit card open and continue using it. Once you miss a minimum repayment at the end of the billing period, the credit card provider could close your account or hit you with hefty fees.
This is the definition given to the transfer of the title of your home, to the bank, who in turn lends you money. Basically when you take a mortgage or home loan out, the bank uses your home as security against the money that it lends you.Back to top
This is an investment strategy where the amount of money you borrow is MORE than the amount of money that you receive in interest or rent payments. The most common example of negative gearing is in property investment. For example you borrow $500,000 at an interest rate of 6% and buy a property. You then rent this property out and whatever money you receive from the tenants is used to repay the original $500,000 loan. Of course the rent received is going to be less than your loan repayments, but you can deduct this difference from your total tax bill as a loss.Back to top
An offset account is a way of paying off a home loan more quickly by linking a transaction account to your home loan and using the balance to reduce loan interest. Any funds in the account automatically offset the interest payable on your loan. For example, a borrower with a $250,000 mortgage and $25,000 sitting in a 100 per cent offset account will only be paying interest on $225,000.
This does not affect the other functions of your account, so you can still withdraw, deposit, check your balance, and make EFTPOS payments. In most cases, you can also have your salary or other receivables deposited directly into your offset account
An ongoing fee is a fee charged by your lender to cover the ongoing maintenance of your loan, credit card or other financial contract. They are supposed to cover the cost of maintaining your account. However, not all loans and credit cards have ongoing fees so it pays to do your homework here.
This is a savings account that provides at-call access to your money through the internet and over the phone. These accounts normally offer a higher rate of interest because it is cheaper for banks to maintain these sorts of accounts. These accounts generally offer unlimited ATM access.
An overdraft loan is an account that is linked to your transaction account. If you need more money than you have in your transaction account, you set up an 'overdraft' account which gives you access to additional funds. The bank will give you a set limit (such as $5000) and you are able to withdraw money up to that amount. The catch is that the interest is charged immediately (as in daily) and you pay it monthly. Basically it's similar to a credit card account except without the credit card itself
This simply means that the house that you buy is going to be your primary place of residence, i.e. you will not be buying the property as an investment and renting it out to other people.Back to top
If your home loan has this feature, it means that if you move house or buy an investment property, you can transfer the mortgage from your existing property to the new one. This typically happens when you sell your home and move before fully paying the original mortgage.
This is the term given to the actual amount of money borrowed on a loan. This is the amount that doesn't include any fees or charges. The interest that you pay on a loan is calculated on the principal amount. Every time you make a payment on the principal, it goes down, and hence the interest payments go down correspondingly.
When building a home rather than buying, funds can be accessed in small lump sums at various intervals to suit the building process.Back to top
A loan feature that allows you to make additional repayments beyond those required in the loan agreement, and then draw back against these funds if required. A redraw facility allows borrowers to reduce their interest and shorten the life of the loan, while keeping their funds within easy access in case of emergencies. There is usually a one-off fee to activate the redraw facility. Some banks set a minimum and/or maximum redraw amount and charge a transaction fee every time you withdraw. Others offer a limited number of free redraws and will charge you for additional redraws.
Some lenders will charge you a fee when you redraw additional repayments on your loan.
Refinancing simply means taking out a new loan to pay off an old one.
These are given to people who can prove hardship to their loan lenders. The lenders will generally give you a 'holiday' from making repayments.
These programs are designed to reward credit card customers for using their credit card. Depending on what type of program you sign up for, or depending on what program is included with the credit card, you can receive a number of rewards. These range from frequent flyers points, to points that can be redeemed to shopping vouchers, home appliances and electronics. Generally banks will charge a fee for being a member of their rewards programs. The points that you earn are linked to how many dollars you spend. So generally $1 will equal 1 point, however there are programs that will offer 2 points for every $1.
A reverse mortgage is a loan designed for senior citizens who want to convert their home equity into cash. Unlike a traditional mortgage, it does not require monthly repayments; instead, the payment becomes due when the owner dies or sells his home. Interest will also capitalise during the term of the loan, but it is generally agreed that the amount owed will not exceed the selling price of the home.
A revolving line of credit is basically a huge overdraft facility where any money you put in can be withdrawn again.Back to top
A personal loan where collateral is needed to guarantee repayment. Collateral could include residential property, or in the case of a car loan, a vehicle.
An asset you offer on the basis that a lender will sell the asset in the event you default on your loan.
This is a fee that a bank imposes on loans, transaction and savings accounts, and any other product a bank offers. The service fee can pay for things like wages, computer maintenance, branch maintenance etc. The service fee is paid until the loan or account is closed and is generally charged annually or monthly.
This is a term deposit that lasts less that one year. So if you want to keep your money in a bank and earn a higher rate of interest for 30, 60, 90 120, 150, 180 or 270 days then a short term deposit is what you want.
Dividing your loan into one-part fixed and one-part variable interest rates gives you the best of both worlds. These are good to have when you are uncertain of interest rates, or when interest rates are going up as you can lock in a lower fixed rate.
This type of lending is similar to what we know as 'low-doc' home loans. These loans don't meet the normal criteria for money lending and are normally offered to self-employed people, and people who are considered high risk in terms of being able to make repayments. Of course with loans like this there are higher fees, higher interest rates and less loan options like additional repayment options, redraw facilities and portability options.
Moving from one loan type to another during the term of a loan often incurs a switching fee.Back to top
is is a bank account that gives investors a fixed interest rate for a set period of time. These set periods of time can range from one month up to 5 years in length. The longer you leave your money with the bank, the higher the interest rate. Some banks offer term deposit specials on shorter periods of time, which usually occurs when banks are in need of short term funding. The main difference between term deposits and savings accounts is that your money is inaccessible until the set period of time is up. If you want to withdraw your money then you will pay a hefty fee.Back to top
An unsecured personal loan is a loan where no collateral is needed to guarantee repayment.
These are charged by a lender to process your loan application. Some lenders will waive upfront fees, so it pays to shop around.Back to top
A valuation is a report that contains a valuers opinion of a property. This valuation sometimes differs from a purchase price, and although it is not required by banks for all home loans, it is required for some.
This is basically the fee charged by the valuer to make a valuation (see above). This fee is normally charged by banks, who then pay the valuer to inspect the potential property that will be used as collateral for the home loan.
An interest rate that will move with the official cash rate set by the Reserve Bank of Australia (RBA).
Also know as a standard variable loan, the interest rate charged will fluctuate in line with the official cash rate set by the Reserve Bank of Australia (RBA).Back to top
This is basically the borrowing and lending that large banks and corporations do. What we, the everyday person, uses is 'retail banking'.Back to top
This is another term for 'rate of return'. A yield is expressed as a percentage and is the amount of interest you can expect to earn on an investment. Example: for a term deposit with an interest rate of 6.50% you could also say that "the term deposit will yield 6.50%".Back to top