Glossary - Finances
Buying property is the biggest investment most people make, so it’s important to understand as much of the process as you can. There are many terms relating to the financial aspects of property purchases that can bamboozle the uninitiated. The list below contains some of the key terms you need to know about banks and taxes.
This is the bank’s estimation of the value of the property you are looking to buy. It is quite often a conservative estimate which will be lower than the advertised or market value.
While it sounds quite strange, this simply refers to the number of years it will take you to completely pay off your mortgage. This period varies in length but 20 and 30 years are the most common mortgage amortisation periods in Australia.
Fixed Interest loan
This is when the interest rate stays the same during a period of the loan. You may choose to fix the interest for the first three years. This can be an advantage if interest rates climb during this period and allows you to accurately predict future payments.
Basically, this is the price you pay to the bank for providing the loan to buy the property. It is calculated on the amount you borrow (principal). The rate of interest can be fixed, variable or even a combination of the two (“split loan”).
This stands for Lenders mortgage insurance. This is often required if a borrower doesn’t have a big deposit. The cost of this will be added to the borrowed amount and paid off within the mortgage. LMI is designed as a protection for the lender.
This stands for Loan-to-value ratio. The LVR is a percentage calculated by simply comparing the amount of money you have to borrow to the value of the property. If the LVR is high (over 80 per cent, for example), LMI is more likely to be charged.
Mortgage Offset account
A mortgage offset account allows your savings balance to offset the balance in your home loan account, rather than earning interest on your savings balance. This reduces the interest charged on the mortgage.
Mortgage protection insurance
This is an insurance policy to cover a borrower’s mortgage repayments if they cannot pay them due to illness or injury.
Mortgage registration fee
This is a State Government charge paid when a home loan is registered.
Split Interest loan
A split interest loan allows you to use part of your loan amount with a variable interest rate, and another part with a fixed rate. You get the advantage of the security of a fixed rate but also the flexibility of a variable rate. If the interest rates rise a split interest loan can reduce the impact.
Variable Interest loan
In a variable interest rate loan, the interest rate charged on the amount owed varies as official and bank interest rates change. This means your re-payments will vary as well.
This is the ‘official’ term for the profit on the sale of a property, which is called a capital asset.
Capital gains tax (CGT)
CGT is the tax on any profit made from the sale of an investment. This would apply to investment property not the family home.
When you borrow money to invest it is referred to as ‘gearing’. Any income you earn from the investment is said to be ‘positively or negatively geared’. Negative gearing is when the costs of the investment are more than the income you receive from it. In Australia, the tax system allows you to use this investment loss to offset any other income you earn, allowing you to pay less tax.
This is a tax applied when a property purchase is made. It is calculated on the purchase price and varies in the different states and territories of Australia.
The list below contains some of the key terms you need to know about banks and taxes (find an explanation of the terms used in Real Estate here).
Want help to cut through the investment jargon? Accrue Real Estate has the experience and knowledge to help in your property investment decisions. Contact Accrue Real Estate to get the clear picture of Melbourne property investment opportunities.