If you are new to property investment, or even if you have been in the game for a while, some of the terms and jargon that is commonly used can get confusing.
Here we have put together a helpful glossary of terms commonly used in property investment. Some you may be familiar with, some you may just be coming across for the first time. Remember, if you have any questions regarding investing in property in Australia, please don’t hesitate to get in touch.
AARP – Annualised Average Percentage Rate. Also known as the comparison rate, it consolidates all the costs associated with the loan, such as services charges, interest, loan fees and mortgage insurance, and is used to compare loan products.
Allowances – An amount in your contract set aside for anything that my come up that have not been initially selected and specified in the construction contract.
Amortisation period – The length of time a mortgage is calculated over and payed off.
Appraisals – A written report on the estimated value of a property, prepared by a professional valuer.
Appreciation – An increase in the value of a property (the opposite of depreciation).
ATO – The Australian Tax Office
Balloon – A short-term loan, that has fixed monthly payments with a larger lump sum that is paid at the end of the term.
Basic variable – A loan at a lower rate and with less features than a standard variable home loan.
Break costs – If a loan is paid off ahead of time there may be extraneous fees called ‘break costs’.
Bridging finance – A temporary loan used to bridge the gap between buying new property(s) and selling old ones.
Captial gains – The amount that your property has increased in value compared to what you bought it for. For example, if you bought a property for $500,000 and it is now worth $650,000 then you have made a captial gain of $150,000. This amount is subject to tax (see below).
Capital gains tax – You must pay tax on your capital gains. This amount is assessed by the ATO.
Capped rate – This is when you agree with your lender that the interest rate on your loan will not be above a specific rate within a specific time frame.
Conditions, Covenants, and Restrictions (CC and Rs) – The conditions that dictate how a property can or can’t be used.
Conveyancing – The legal process that transfers property ownership between two entities.
Cooling-off period – A period of time given you to legally withdraw from buying a property (this is different in various states and territories).
Cross-securitisation/cross-collateralisation – This is when a financial institution uses your property (whether it’s an investment or your home) as security for any other property you purchase.
Deposit – The amount of money due to secure in a property.
Default – Failure to pay a debt by its due date.
Density – The level of occupancy in an area.
Depreciation – A decrease in the value of a property (the opposite of appreciation).
Due on sale – A clause in mortgage contracts that means you must pay off the outstanding balance of a loan if you sell or transfer your property.
Equity – The difference between your mortgage and your property’s theoretical value. For example, if you’re home is worth $500,000 and you owe $200,000 on your mortgage then you have an equity of $300,000.
Fixed rate – A home loan that is locked at a specific interest rate for a specified term.
Free hold – Meaning you can use land however you wish (subject to zoning and government control).
Interest-only – When you only repay the interest charged on your mortgage, not anything off the principal or amount owing.
Joint tenant – An agreement whereby two persons may own a property together and each owner has an equal share in the property.
Landlord – The person who owns a property that is being rented out.
Lenders Mortgage Insurance (LMI) – This is sometimes required when you are borrowing borrowing a large percentage of a property’s value, usually more than 80%. It provides insurance to the lender in case the borrower defaults on the loan.
Loan-to-Value Ratio (LVR) – The loan amount divided by the value of the property multiplied by 100, in percentage figures. This is used by financial institutions to measure whether they think you can afford the loan.
Market value – The theoretical assumption of the highest price a property could sell for in the open market.
Median house price – The middle price of all sales recorded in a particular suburb, postcode, city or state.
Negative gearing – When the cost of owning an investment exceeds the income received, the ATO allows investors to offset the loss against their income. This is known as negative gearing.
Off the plan or off market – An off market property is one that is in fact for sale but is not being advertised on general portals. These are generally sold off the plan before the property has actually been built.
Passed in – when the highest bid at an auction for a property doesn’t meet the reserve price. This means that the house doesn’t sell at auction.
Portfolio – The amount and type of investments you own.
Positive cash flow – When your income from an investment is more than your outgoings after tax-deductible items have been claimed you have positive cash flow
Positively geared – When the income from your investment exceeds your expenses.
Price on application (POA) – When the price of a property is not available publically, but is only accessible when the vendor is contacted privately.
Principal and interest – The amount borrowed or still to be repaid and the interest still owing on the mortgage.
Property cycle – The property market moves in a cycle. Prices rise, fall then stabilise like clockwork every 7-10 years.
Refinancing – To get new financing on different different terms. This is usually to pay off an existing loan with a new one (very lucrative when interest rates drop).
Rental yields – The return on your investment property, expressed as a percentage of the amount invested.
Reserve – The minimum amount a vendor will accept at an auction.
Serviceability – Whether a finance institution thinks you can manage your mortgage payments, based on your income and expenses.
Stamp duty – A government tax on the transfer of property calculated on the value of the property.
Subdivision – Land that is divided into individual lots.
Tenants in common – When two or more buyers own a property but have unequal shares and rights.
Title deed – A document showing ownership of property.
Vacancy rates – How many dwellings are available for rent in a specific area over a specified time period.
Vendor – The seller of a property.
Yield – The total return by an investor on an investment, shown as a percentage of the amount invested.