What is premium rate

What is premium rate

In Australian financial terms, the phrase premium rate can be relevant in two specific scenarios. Firstly, it pertains to the issuance of equity in a limited liability company beyond the obligatory share capital. Secondly, it relates to making overpayments on a fixed-rate loan.

Premium Rate: Equity in a Company

When setting up a proprietary limited company, you might opt to furnish additional equity above the minimum share capital required. Such an excess is known as a premium on shares or simply a «premium rate». This surplus can serve several purposes, such as bolstering the company’s liquidity, covering initial operational costs, or allowing for future financial withdrawals.

Premium Rate: Loan

If the fixed interest rate of your loan is higher than the bank’s current offering to new clients, extra repayments cause the bank to sustain a financial loss known as a «premium rate». In this event, you may be responsible for covering this loss, which compensates the bank for the difference between your agreed rate and the prevailing lower rate.

Conversely, a discount rate occurs when you have a fixed interest rate that is below the bank’s present offering. As a result, your extra repayments generate profit for the bank. In such cases, this profit can be returned to you or used to reduce your remaining loan balance. This profit is classified as capital income for taxation purposes.

The potential for this profit distribution is contingent upon your loan’s fixed-rate agreement, particularly the lock-in period for the interest rate and the duration of your loan. Bear in mind that no profit payments are permitted within any agreed «quarantine period».