CUA boss encourages Aussies to embrace financial jargon
16 July 2009
AUSTRALIA’S largest credit union CUA (Credit Union Australia) is encouraging people to take matters into their own hands and learn the meaning of a variety of financial terms so they are better educated when making financial decisions.
CUA Acting CEO Rob Nicholls said whether a person had a financial adviser or not it was a smart idea for people to learn basic financial terminology to fully understand the terms and conditions when opening a new account, signing a financial agreement or investigating investment options.
“Rather than having to ask your financial planner or a family member the meaning of a finance term when, for example, you are looking to open a new account to save more money or to tie in with your home loan, wouldn’t it be great if you already knew the answer?” he said.
“The reality is that most people have no idea what various financial terms mean when they apply for a new business loan or home loan and they put themselves at a disadvantage.”
Mr Nicholls said his ‘quick-list’ of financial terms that Australians should know and understand includes the following:
Mortgage offset facility – a savings account linked to your loan account. An offset account works like a regular savings account, except the balance in the savings account is offset against what’s owing on your mortgage, effectively reducing your loan account balance before interest is calculated. Over time, with the savings in your offset account reducing the
loan interest you have to pay each month, you will pay off your loan sooner and build up equity in your property.
Redraw facility – As long as you have the type of loan that allows you to attach a redraw facility to it, any additional repayments made to your loan account can be accessed when necessary. A redraw facility has two key advantages – it encourages borrowers to make extra repayments which allows them to save on interest costs and it provides flexible access to funds when they are most needed.
Stamp Duty – state and territory governments impose stamp duty taxes on a range of paper and electronic transactions including motor vehicle registration and transfer, insurance policies, leases and mortgages, hire purchase agreements and transfers of property such as businesses, real estate or shares.
Equity – when referring to a housing loan, equity represents the difference between the value of the property and the remaining loan balance. Effectively, it’s the portion of the property that you own and gives you borrowing power if you’d like to take out another loan.
Mortgage default – a mortgage or home loan default, or mortgage or home loan arrears, arises when the loan contractual repayments are not being met. If you find yourself in this position, you should speak to your loan provider immediately as there are various options which can be deployed, such as arranging repayments on the home loan, hardship assistance or refinancing of the property.
Fixed interest rate – Financial institutions offer housing loans with interest rates that are fixed for a certain term. This means repayments on the loan are guaranteed not to change, whether official interest rates rise or fall, within the fixed term. These types of loans are often less flexible than loans with variable interest rates and paying the loan out during the fixed term often attracts significant ‘early repayment fees’.
Interest only loan – A loan with repayments that are equal only to the amount of interest being charged on the balance. This type of credit is more commonly used for investment purchases.
Term deposit – An amount of money placed with a financial institution for a fixed period. The deposit generally earns a higher rate of interest than other standard savings accounts, but the funds cannot be accessed until the fixed term expires.
Negative gearing – An investment strategy in which related costs such as interest payments on funds borrowed to buy an income-producing asset, such as property or shares, exceed the income from the asset. This can be a loss-making situation, however, the interest and other expenses may be deducted from the investor’s taxable income and if the asset shows good capital growth the net benefits can be substantial.
Bridging finance – a loan which is only for a short period of time, usually one to six months. This type of finance is used predominantly for business purposes such as cash flow, unexpected business costs, buying equipment or expanding or acquiring a new business, but can also be used to purchase investment property, shares, paying tax bills and the like. This finance is almost always secured against equity in your real estate.”
