The Ultimate Property Investment & Home Loan Jargon Buster

The property world is full of words and expressions that may be unfamiliar to anyone who is not regularly buying or selling a home or investment property. We have put together our top 20 essential property investment and home loan terms you should know!

Planning to invest in property but confused by the myriad of banking and property investment jargon? You're not alone. Many people struggle to understand loan terms and the multitude of acronyms used by bankers and mortgage brokers.


Although you may seek advice from your local bank or mortgage broker, having a basic understanding of these terms will ensure increased confidence before signing on the dotted line.


1. Loan to Value Ratio (LVR)

Amount of loan you are borrowing compared to the value of the asset, expressed in percentage terms. For example, if you are borrowing $300,000 on a $500,000 home, your LVR is 60% ($300,000/$500,000).


2. Lender's Mortgage Insurance (LMI)

Generally, lenders prefer an LVR (Loan to Value Ratio) of up to 80%. If the LVR is above 80%, lenders may ask you to pay Lender's Mortgage Insurance (LMI). The LMI premium is paid to protect the lender should you default on the loan, and the property sale does not cover its cost of lending you more than the standard 80%.


3. Fixed and variable interest rate

A fixed interest rate is set for a specified period. In contrast, a variable interest rate may move up or down according to current economic conditions.


4. Guarantor

A Guarantor is a third party (usually an immediate family member) providing security to the bank against your loan. If you default, the bank can recover any outstanding amount from them. Generally, if you have a guarantor, the bank may waive any LMI cost.


5. Principal and interest repayments

With these types of repayments, you are repaying both the interest and the principal component (borrowed amount) of the loan.


6. Interest only repayments

With these types of repayments, you are paying only the interest component for a certain period.


7. Offset account

This type of account is a transaction account linked to your loan. The balance in this account offsets your loaned amount, reducing the interest component. For example, if your outstanding loan is $500,000 and you have $20,000 in this account, you will pay interest on $480,000.


8. Stamp duty

A State Government tax based on the value or purchase price of the property.


9. Redraw facility

With this facility, any extra repayments you make on your loan can be accessed at a later date. For example, if your minimum monthly repayments are $2,000 but you repay $3,000, you can access (redraw) the $1,000 if you need it.


10. Gearing

The ratio of your own money and borrowed funds in an investment.


11. Pre-approval or conditional approval

Before applying for a formal loan, you can apply for pre-approval. The lender will state how much they are willing to lend you, pending certain conditions (such as the bank's property valuation or taking out home insurance). Pre-approval also lets the vendor know that you are serious about buying their property.


12. Settlement date

The date on which documentation for the transfer of ownership of property from the seller to the buyer takes place upon finalisation of the purchase price. It is also usually the date on which the buyer assumes possession.


13. Bridging finance

Bridging finance describes a short-term loan that covers the time gap between the purchase of a new property and the sale of an old property.


14. Exchange of contracts

When you hear of people ‘exchanging contracts’ this refers to the legal point of time when the vendor and purchaser swap documentation and start enquiries with a view to settlement. Exchanging contracts is the legal component of buying a property. Two identical copies of the contract of sale (one for the purchaser and one for the seller) are prepared once all inspections are completed and the finance is approved in writing. Each party signs their own copy of the contract of sale then they are swapped or 'exchanged'. The contract then becomes binding on both parties and generally would not be altered.


15. Reserve price

The 'reserve price' is the specified minimum price that is acceptable to a seller at auction and which commits the seller to sell the property if the reserve is reached.


16. Cooling-off

A 'cooling-off period' may also apply after contracts are exchanged. This refers to the period of time during which the purchaser may cancel the contract, although they will lose a portion of their deposit. The cooling-off period is not available for properties purchased at auction and is not available in all states, so check with your legal adviser.


17. Honeymoon rate

A honeymoon rate, or introductory rate home loans offer a lower interest rate for an introductory period, usually the first 1-3 years of the loan.


18. Negative gearing

Where the income from an investment property is insufficient to meet the interest costs of the loan used to fund the investment property. Gearing can be positive, neutral or negative, and it’s this last one that is most common when it comes to property investment. As a simple example, if your interest on the investment loan amounted to $25,000 p.a. and the rental return was $20,000 p.a. you would be negatively geared to the tune of $5,000 p.a.


19. Off The Plan

When you buy a property from the plans only and not the finished building.


20. Refinancing

To replace or extend an existing loan with funds from either the same or another lender.


The importance of understanding basic banking terms cannot be understated.


For example, you sign an offer document on your dream home, thinking that your loan is approved. However, you later realise that you only have conditional approval, with a clause that you must first repay your credit card debt.


The bank then rejects or delays your loan approval until that condition has been met. As a consequence, the seller rejects your offer, and you lose out on your dream home! Devastating!


When meeting with your bank or mortgage broker, along with asking about your borrowing power, be sure to also ask how some of the above terms impact your situation, i.e., would an offset account or a redraw facility fit your situation?


You will come across so many terms and acronyms in your journey loan application journey. So, keep a curious mindset and most importantly, keep learning.



Want to speak to our Financial Planning team about property investment and growing wealth?

Investment Zone is here for you. Arrange a no-cost, no obligation appointment with Financial Planners Brad Macaulay and Amber Simpson at www.investmentzone.com.au/bookonline











 

The information in this communication has been prepared on a general advice basis only. The advice has been prepared without taking account of your specific objectives, financial situation or needs. Accordingly, you should, before acting on the advice, consider the appropriateness of the advice having regard to your objectives, financial situation, and needs. In cases where the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement (or other relevant information statements) and consider such document before you make any decision about whether or not to acquire the product. For these reasons, it is imperative that you seek advice from your financial adviser before making any investment decisions. Investment Zone Pty Ltd (ABN 18 104 622 611) provides financial services as a Corporate Authorised Representative no. 296974 of Financial Force Pty Ltd ABN 42 091 425 464, AFSL no. 238337

Featured Posts
Recent Posts
Archive
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square