If you’re new to property investment, understanding all of the jargon involved can be tricky.
As your mortgage broker, our mission is to help simplify and support you through the process of investing in property, which is why we’ve put together this handy list explaining the key lingo you’re likely to encounter. Right, students, pens at the ready, it’s time for some learning!
A bank valuation is the bank’s estimate of the value of a property. When you apply for a home loan, your lender will send an independent valuer to appraise the property. The bank valuation is usually more conservative than the market value, because it’s designed to limit the lender’s risk and indicates the amount they can expect to recoup if the property is repossessed. It’s important to note that a bank will not accept your valuation of the property, even if you obtain your valuation from an independent valuer.
Capital gain is the term used to describe the profit on the sale of the property, once all expenses have been deducted. Capital Gains Tax (CGT) is applicable to capital gains on investment properties purchased on or after September 20, 1985, but does not apply to your principal place of residence in most instances.
The tax you pay is based on the sale price minus the cost involved in acquiring and holding the property (your cost base), and any gain is included in your assessable income in the financial year you sell the property. There may be several exemptions for paying capital gains tax (CGT). For example under the ‘Temporary Absence Rule’ – if you move out of your home and rent it out, the property may still be treated as your principal residence for up to six years and you are exempt from CGT. However, the exemption rules may vary from state to state, so it is wise to speak to your accountant about CGT and ask them to explain any exemptions that may be applicable to you.
Capital growth is the increase in value of the property over time. The supply and demand in an area impacts the capital growth. If there is high demand from buyers and limited supply, the prices are likely to rise.
Current market value
Not to be confused with the listing price, nor the most recent offer on a property, the current market value, as defined by The International Valuation Standards Council, is: “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
Depreciation is the decline in the value of an asset over time. As an investor, you may be able to claim depreciation on the property buildings and the items within it against your taxable income, but again you should check with your accountant to see what tax deductions are applicable to you. In order to claim depreciation, you will need to employ a qualified Quantity Surveyor to prepare you a depreciation schedule. The tax office will not accept a depreciation schedule that you prepare yourself.
Equity is the current market value of a property minus any outstanding mortgage repayments. Investors can use the equity from the increasing value of an investment property to purchase a new property – if you are interested in doing this, talk to us about refinancing your current loan.
Lenders’ Mortgage Insurance (LMI)
This is a fee charged by lenders to protect themselves against borrowers who default, in case the net proceeds of a foreclosure do not cover the loan. LMI is applicable to all borrowers who do not have a deposit of 20% or more.
Loan-to-value ratio (LVR)
The LVR is the proportion of money borrowed versus the value of a property. Lenders take into account the LVR when assessing mortgage applications, as the lower the LVR, the lower their risk. Usually, lenders will require you to pay LMI if they’re lending more than 80% of the value of the property.
Negative gearing applies when the property’s expenses surpass the rent earned. These expenses can be used to reduce your taxable income. Positive gearing is when the rent exceeds the costs and the property pays for itself.
The rental yield is the annual rental income, expressed as a percentage of the property’s value. It’s often quoted when examining a property’s rental potential and may be calculated as a gross percentage (before expenses are subtracted), or as a net percentage (accounting for purchasing or transaction costs). The rental yield can help investors determine the potential income and cash flow involved in purchasing a property.
Suburb growth refers to the capital growth of properties within a particular suburb. As an investor, it a good idea to thoroughly research a suburb’s profile, including its capital growth potential, before purchasing a property.
The vacancy rate is the amount of properties vacant in an area. It is a useful way for investors to assess the rental demand of a suburb before purchasing. Investors usually prefer a suburb with a low vacancy rate, because it indicates a likelihood of being able to find tenants quickly and easily.
Zoning refers to government laws specifying how property can be used. Properties may be zoned for residential, industrial, business, or other purposes. It’s important to be aware of zoning, as it affects the home loan you take out, capital growth potential, plus future renovation plans.
Investing in property is exciting, but it can also be confusing with so much new terminology to digest. We can help you make smart investment decisions and alleviate the stress by helping you decide the right structure for your property investment loan and by guiding you through the loan application and settlement process. Contact us today for more information.