Finance and property jargon unravelled
APPRAISAL/VALUATION – a written report of the estimated value of a property, usually prepared by a valuer.
CAPITAL GAIN – the amount by which your property has increased relative to what you paid for it.
CASH RATE/BANK RATE – the cash rate is the rate at which the Reserve Bank of Australia sets interest rates. The bank rate is the interest rate that the banks offer and is above the cash rate to allow for profit margin.
CASH FLOW POSITIVE – you have a cash flow positive investment if the incomings are more than you outgoings after tax-deductible items have been claimed. You receive more rent than your mortgage repayments, plus you are still ahead after taking into account items such as interest on the loan, maintenance, insurance, land tax, rates etc.
CAPITAL GAINS TAX (CGT) – this is the tax that you pay when you sell an investment property if you have made a profit.
COOLING OFF PERIOD – a period of time given to the purchaser to legally withdraw from buying a property. The length of time varies in each of the states and territories.
CROSS SECURITISATION/CROSS COLLATERALISATION – where the financial institution uses your property (whether owner occupied or investment) as security for another property that you purchase.
DENSITY – the level of occupancy in a given area, or the number of people permitted to reside in an area. For example, inner-city areas are usually higher density than outer-suburban areas.
EQUITY – the difference between your mortgage and your property’s value. If your home is worth $500,000 and you owe $200,000, then you have equity of $300,000.
FIXED RATES – where a home loan is locked in a specific interest rate for a specified term, usually 1 to 5 years.
INTEREST ONLY – only repaying the interest charged on your mortgage, not paying anything off the principal or amount owing.
JOINT TENANTS – each owner has equal shares and rights in the property.
LENDERS MORTGAGE INSURANCE (LMI) – usually required by lenders when borrowing more than 80 per cent of the property’s value. It provides insurance to the lender in case the borrower defaults.
LINE OF CREDIT (LOC) – a facility available from financial institutions that gives you a credit limit that you can draw down at any time. It’s similar to a credit card, except that you don’t have to make repayments but you do have to pay interest on the amount drawn.
LOW DOC LOANS – relatively new, these are loans that don’t require as much documentation to set up the loan. They are popular with self-employed people and those who have not yet established a credit rating.
LOAN TO VALUE RATIO (LVR) – to calculate it, divide the loan amount by the value of the property then multiply is by 100 to get a percentage. Banks and financial institutions use this as a measure of whether you have adequate equity for the loan.
NEGATIVELY GEARED – this is where the incomings are less than your outgoings after all tax deductions have been claimed. Many people with high incomes use negative gearing to reduce their taxable income.
O&A (OFFER AND ACCEPTANCE) FORM – when you make an offer to purchase a property, you sign one of these forms. When the owner accepts the offer, it becomes a binding contract.
OFF THE PLAN – when you buy off the plan, you are buying a property before it is built, having only seen the plans. This is commonly used for apartments or units under construction or about to be built.
PASSED IN – when the highest bid at an auction doesn’t meet the reserve price set on the property. In effect the property doesn’t sell at the auction.
PROPERTY PORTFOLIO – the number and type of investment properties you own.
POSITIVELY GEARED – this occurs when the investment income exceeds your interest expense (and other possible deductions).
PPOR or PPR – principal place of residence.
POA – price on application. You may see this in a real estate advertisement.
PRINCIPAL AND INTEREST – the amount borrowed or still to be repaid, plus the interest on the mortgage. The principal is part of the repayment that reduces the balance of the mortgage.
PROPERTY CYCLE – property values usually follow the cycle of growth, a slowdown, a bust and an upturn. History shows that this occurs every seven to ten years.
REVERSE MORTGAGE – designed for seniors who are asset-rich (usually with their PPR) but cash-poor. The facility allows them to access the equity in their homes without having to sell it. Most often the loan is not paid out until the borrower dies, moves into a nursing home or relocates.
RENTAL YIELDS – the return on an investment as a percentage of the amount invested.
RESERVE PRICE – the minimum amount a seller will accept at an auction.
SOLD UNDER THE HAMMER – this means a property that goes to auction sells at the auction.
SERVICEABILITY – whether you can manage your mortgage payments, based on your income and expenses.
SUPPLY AND DEMAND – the number of properties on the market at any given time determines the supply and demand equation. If there are lots of properties on the market, it’s a buyers’ market. If there are few properties on the market or those that come on to the market sell quickly, then it’s a sellers’ market.
TENANTS IN COMMON – two or more buyers own a property with unequal shares and rights.
VACANCY RATES – a measure of how many dwellings are available for rent over a specified time period. A low vacancy rate means there are not many dwellings available for rent, while a high vacancy rate means there is ample supply of rental properties.
VENDOR’S TERMS – when a seller is prepared to offer a buyer finance or other assistance such as staged payments to assist with the payment of a property.
