Jargon buster: Property investing edition

Written and accurate as at: Apr 15, 2021 Current Stats & Facts

Many industries use jargon (technical words)—and the finance industry is no exception. In many instances, understanding this jargon can help you when making informed personal finance decisions.

With this in mind, we have put together another jargon buster article. However, this time the focus is on helping you understand some of the commonly used jargon in relation to residential property investing.

 

 

Property investing jargon busters

• Agent. A person who acts for another in selling, buying, renting or managing a property.

• Appreciation. An increase in a property’s value over time. The opposite of depreciation.

• Auction. The selling of a property in public by a licensed auctioneer.

• Bid. An offer to buy (at a given or stated price) a property that is being sold by auction.

• Borrowing power. The amount of loan a lender may offer, based on several factors (e.g. income and expenses).

• Bridging loan. A loan that bridges any cash gap when buying a new property before selling the old one.

• Building inspection. An assessment of a property for minor and major defects, by a licensed professional.

• Building insurance. Covers against loss or damage to a property due to specific events.

• Capital gain. The increase in capital value of a property, when it’s sold for more than its costs (including its purchase price and stamp duty, for example). The opposite of capital loss.

• Capital gains tax. A tax on capital gains.

• Capital loss. When a property is sold for less than its costs. The opposite of capital gain.

• Certificate of title. The formal record of a property, e.g. lot or plan details and the current owner.

• Commission. The remuneration of an agent for services rendered, e.g. to affect the sale of a property.

• Comparison rate. A rate that represents the true cost of a loan (the interest rate and fees and charges).

• Contents insurance. Covers against loss or damage to a property’s contents due to specific events.

• Contract of sale. A legal document detailing the conditions relating to the sale/purchase of a property.

• Conveyancing. The property ownership transfer process, often facilitated by a conveyancer or solicitor.

• Cost base. The total cost of buying a property (relevant to capital gains tax).

• Debt. An amount of money owed to a lender that must be repaid over a period.

• Default. The failure of a borrower to make the required loan repayments.

• Deposit. A contribution to a property’s purchase price. Often, 20% to avoid lenders mortgage insurance.

• Depreciation. A decrease in a property’s value over time. The opposite of appreciation.

• Equity. The difference between the value of a property and the amount of debt owing against it.

• Fixed-rate loan. An interest rate that is ‘locked in’ for a given period (as opposed to variable-rate).

• Gearing. The action of borrowing an amount to purchase an investment property.

• Gearing ratio. This is calculated by dividing the borrowed amount by the value of the property.

• Gross rental yield. The annual rent (before expenses) divided by the value of the property.

• Guarantor. A person who agrees to be responsible for the payment of a loan, should the borrower default.

• Interest rate. The ongoing cost of borrowing, expressed as a percentage of the loan balance.

• Interest-only loan. A loan where only the interest on the loan (not the initial loan amount) is required to be paid.

• Joint tenants. The equal ownership of a property between people. Should one tenant die, the surviving tenants inherit equal shares.

• Land Tax. A tax levied on the owners of land (e.g. vacant land, investment property and holiday home).

• Lenders mortgage insurance (LMI). Covers a lender against potential losses if a borrower defaults.

• Loan to valuation ratio (LVR). The percentage of borrowings in relation to a property’s value.

• Negative gearing. When the expenses of an investment property are greater than the income produced.

• Offset account. A savings or transaction account linked to a loan. The money in this account earns no interest, but also no interest is payable on the corresponding amount of the loan.

• Overcapitalisation. The improvement of a property beyond its resale value.

• Positive gearing. When the expenses of an investment property are less than the income produced.

• Pre-approval. A lender’s indication that they will be willing to lend an amount, subject to conditions.

• Principal and interest loan. A loan where the initial loan amount is required to be repaid as well as interest.

• Property. A major asset class, which may provide returns via capital gains and rental income.

• Redraw facility. The function by which a borrower can withdraw extra repayments made on their loan.

• Refinance. The action of a borrower taking out a new loan to replace the one they already have.

• Reserve price. The minimum price a seller will accept for a property being sold by auction.

• Residential mortgage. An amount of debt secured on a residential property.

• Reverse mortgage. A loan that allows a person to draw down on the equity they have in a property.

• Settlement. The finalisation of a property purchase, when the balance of the sale price is paid.

• Stamp duty. A duty levied on certain transactions, including a property purchase.

• Split loan. A loan where part of the balance is charged at a variable rate and the other at a fixed rate.

• Tenants in common. The equal or unequal ownership of a property between people, which can be passed on to their beneficiaries through their will.

• Valuation. An estimate of a property’s value, which usually forms part of the loan application process.

• Variable-rate loan. An interest rate that fluctuates, generally in line with the RBA’s official cash rate.

 

After reading this article, you may also find of interest the following:

• Stamp duty costs.
• Debt management.
• Property buying costs.
• Property selling costs.
• Government measures:
  • Downsizing measure, Pension Loans Scheme, First Home Loan Deposit Scheme, First Home Owner Grant Scheme, and the First Home Super Saver Scheme.
• Monetary policy, cash rates and interest rates.

If you have any questions regarding this article, please contact us.

 

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