Glossary

Application 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.

Balance transfer

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.

Basic rate

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 rate

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

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.

Cash advance

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.

Combination loan

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.

Comparison rate

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 union

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.

Debt consolidation

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.

Discharge fee

A discharge fee is a fee charged by a mortgage broking 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 broking, or switches to another provider. In recent years mortgage broking 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 broking contract. Lenders are legally required to disclose these fees up front.

Early termination charges

Early termination charges are imposed by some mortgage broking 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.

Establishment fee

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.

Entry fee

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.

Exit fee

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.

Fixed rate

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 broking 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.

Home equity loan

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 rate

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.