If you’re new to the property world, you might be wondering what certain buzz words mean. Although your mortgage broker will be able to explain property investment jargon to you, it’s also great if you empower yourself with knowledge before starting your borrowing journey. We’ve listed some of the most common property investment terminology, and what they mean, to get you started.
Loan-to-value ratio (LVR)
It’s common knowledge that most lenders require a 20% deposit before they will approve your home loan. While you could be forgiven for thinking this figure is set at random, it is actually based on what is known as the Loan-to-Value Ratio (LVR). In this context, the LVR is simply the home loan amount divided by the value of your property.
Offset accounts
An offset account is linked to your mortgage account, and can help to reduce the amount of interest you pay on your home loan. The offset account is basically a funds account that, due to its connection to your mortgage, contributes to lowering the outstanding balance of your loan.
Capital gains
The increase of value to your property, after purchasing, is referred to as capital gain. This amount is usually calculated upon re-selling the property, but it’s best practice to be aware of any appreciation in value to your property as you could potentially leverage the capital gain but refinancing based on a new valuation.
Capital gains tax
Capital gains tax is the fee that you will be liable to pay to the ATO when selling an investment property that has increased in value since you purchased it.
Lenders mortgage insurance (LMI)
In Australia, if you need to borrow more than 80% of the property value, you will need to take out Lenders Mortgage Insurance (LMI). LMI is insurance that protects the lender, in case you default on the mortgage payments. With this insurance, you are effectively mitigating the risks and increasing the chances that your finance will be approved, which means that you’re more likely to secure that dream home! LMI tends to cost approximately 2% of the total loan amount, but unlike most other types of insurance, it can be capitalised onto your loan – effectively adding it to your mortgage repayments.
Equity
The component of your property that you completely own (i.e the amount that you have paid off) is referred to as equity. You can leverage this equity in your favour to secure more investment properties or to put towards renovations.
Stamp/transfer duty
Stamp duty (or transfer duty) is a tax imposed by the state government on property purchases. In Queensland, stamp duty is calculated based on the purchase price of your property. It is payable within 30 days of your contract becoming unconditional. You may be eligible for a concession or exemption on stamp duty if you are a first-time home buyer or purchasing a property off-the-plan. If your new property is your primary residence, you may consider applying for a principal place of residence concession (PPR).
Refinancing
Refinancing your mortgage is essentially evaluating your current loan and looking for a better deal. Refinancing your home loan can help you to secure a better interest rate, saving you money. You will also be able to access better loan features, now and in the future. You may also be able to access equity to fund renovations, purchase new assets or use as an investment property deposit. If you have other debts you would like consolidated, you can also look into doing this to create more manageable repayments.
Negative Gearing
If you own an investment property that you rent out, it would be considered negatively geared if your expenses outweigh the rental income generated. Although this sounds negative, it could give you a tax advantage. This is why negative gearing is actually used as a strategy amongst property investors.
Positive Gearing
As you might assume, positive gearing is the opposite of negative gearing. If your investment property is making you a profit, you would consider it to be positively geared. This will generate you income, but of course that also means paying more tax.
Depreciation
Depreciation is the reduction that may occur to an asset over a period of time. In terms of property investment, this often refers to aspects of your property such as carpets and appliances. These items usually lose a bit of their value each year, but the good news is that this depreciation is tax deductible.
Rental Yield
If you rent out your investment property, the amount that your tenants pay in relation to your property’s value is referred to as rental yield. To work out your rental yield, you can simply calculate the weekly rent paid by 52, then divide that figure by the property’s value. This figure is your rental yield.
Property investment terminology can take some getting used to, so we hope that our guide has empowered you with some expert knowledge to take into your property purchasing journey. The home loan process involves a fair bit of research and planning, but with the right preparation it doesn’t have to be a daunting endeavour. Our team of expert mortgage brokers can help you with your home loan needs. Book an appointment with one of our Borro brokers today or call the team on 1300 1BORRO.
