Are you thinking about dipping your foot in with buying a home or property investment, but don’t really know where to start? There is a lot of information out there, but many new home owners and first-time investors become overwhelmed by all the technical stuff. Don’t panic though. Here is a list of some of the most common phrases related to property investment and home ownership — and they have been de-mystified for you.
Capital gain occurs when the property increases in value, over and above what you paid for it, and what you have spent on repayments, improvements and additional costs. If you purchased a property for $200,000, and you spent $40,000 on improvements and $50,000 on repayments—then you sold the property for $350,000, your gross capital gain would be $60,000.
Equity is the difference between what you owe on your loan, and how much your property is worth. You can build equity by investing in property that is likely to increase in value, while you work to reduce your loan amount. If you purchase a property for $300,000 and you put down a $30,000 deposit you would owe $270,000. Therefore, you have $30,000 equity in the property.
Your investment strategy is the plan that you make, taking into account your financial goals. Are you looking for a way to get a quick win—and only plan to focus on short-term gain? Or are you looking to build an investment portfolio over a number of years or decades? This could be something to discuss with your accountant or financial planner, as well as your Mortgage Broker.
Interest only loans
Interest only loans allow you to borrow money and only repay the interest for a specific period of time. Usually the interest only period lasts from 1 to 5 years. These loans are helpful if you’re focusing on short term gain, and plan to sell the property within the first few years.
Introductory rate loans
‘Honeymoon rate’ loans offer a lower interest rate for a short period at the beginning of the loan, before you return to standard variable interest rates. These loans can be attractive for owner builders, or those planning to achieve a short-term gain on their investment. The lower repayments mean that you could pay more off your loan balance in the short term.
Line of credit
A line of credit is a pre-approved amount of money that you can borrow when you need it, either as a lump sum or in small portions. This option is popular with experienced investors, who are always on the lookout for their next property purchase, and need to be able to move quickly.
A redraw facility allows you to make extra repayments against your loan, and then take the money back later if you need it. This is a great feature for people buying and selling multiple investment properties.
All-in-one accounts are designed so that all of your income goes to the one place, and the account is used for your loan as well as all of your expenses. Because everything goes into this account, the amount that you owe will be reduced. Be sure to look into all of the fees involved with this option.
If you’re building a home and you don’t need to borrow the full amount upfront, a construction loan allows you to only pay interest on the amount that you have spent.
Bridging finance is designed to help you purchase one property before you sell the other. Once you sell the old property, the funds are paid straight into the loan for the new property. The danger here is if you don’t sell the old property as quickly as you thought, you will be responsible for servicing a much larger loan.
Interest only repayments
You only pay the interest on the loan, not the principal, usually for the first one to five years although some lenders offer longer terms. Many lenders give borrowers the option of a further interest-only period. Because you’re not paying off the principal, your monthly repayments are lower. These loans are especially popular with investors who pay off the principal when the property is sold, having achieved capital growth.
If you pay more than the required regular repayment, the extra amount is deducted from the principal. This not only reduces the amount you owe but lowers the amount of interest you repay. Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.
Weekly or fortnightly repayments
Instead of a regular monthly repayment, you pay off your home loan weekly or fortnightly. This can suit people who are paid on a weekly or fortnightly basis, and will save you money because you end up making more payments in a year, cutting the life of the loan.
This allows you to access any extra repayments you have made. Knowing you have access to funds can provide peace of mind. Be aware lenders may charge a redraw fee and have a minimum redraw amount.
You can take a complete break from repayments, or make reduced repayments, for an agreed period of time. This can be useful for travel, maternity leave or a career change.
This is a savings account linked to your home loan. Any money paid into the savings account is deducted from the balance of your home loan before interest is calculated. The more money you save, the lower your regular home loan repayments. You can access your savings in the usual way, by EFTPOS and ATMs. This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings. Lenders provide partial as well as 100% Offset Accounts. Be aware, the account may have higher monthly fees or require a minimum balance.
Your lender automatically draws repayments from a chosen bank account. Apart from ensuring there is enough cash in the account, you don’t have to worry about making repayments.
All-in-one home loan
This combines a home loan with a cheque, savings and credit card account. You can have your salary paid into it directly. By keeping cash in the account for as long as possible each month you can reduce the principal and interest charges. Used with discipline, the all-in-one feature offers both flexibility and interest savings. Interest rates charged to these loans can be higher.
Home loans over a certain value are offered at a discounted rate, combined with discounted fees on other banking services. These can be attractively priced, but if you don’t use the banking services you may be better off with a basic variable loan.
If you sell your current property and buy somewhere else, you can take your home loan with you. This can save time and set-up fees, but you may incur other charges.
LVR or Loan to Value Ratio
Your LVR is another way of describing the equity you have in your home. An LVR of 90% means that your loan is 90% of the estimated value of your property, meaning that you have 10% equity. So on a $500,000 home, that would mean you owe $450,000 and have $50,000 worth of equity. If you sold the home for $500,000 you would have $50,000 left over. The lower your LVR, the stronger your financial position. A lower LVR gives you more lending options and usually makes cheaper loans available to you that your Broker can help you obtain.