25 Essential Finance Terms for Property Investors and Home Buyers

Whether you're stepping into property investment for the first time or you're an experienced buyer looking to expand your portfolio, understanding the terminology that underpins the world of finance is critical. This guide provides a clear and concise breakdown of 25 essential terms that will enhance your knowledge and give you the confidence to make informed decisions regarding property investments and mortgages.

1. Mortgage

A mortgage is the cornerstone of property purchasing. It is a loan secured against the property itself, typically repaid over 25 to 30 years, with a fixed or variable interest component. Mastering the structure of your mortgage will ensure you leverage it to your advantage.

2. Principal

The principal is the initial loan amount you borrow to purchase a property. As you make repayments, this figure decreases, ultimately lowering the overall loan balance. Regardless of the term of the loan, whether it is over 20, 25, or 30 years, the principal needs to be repaid in full over this period of time.

3. Interest

Interest is the cost of borrowing, calculated as a percentage of the principal, and charged by the lending institution or bank lending the money. Over time, you’ll end up repaying more than the initial $500,000 principal because of these interest charges, which compensate the bank for lending you the money. For property investors, monitoring interest rates is key to managing cash flow and overall profitability of their investment.

4. Loan-to-Value Ratio (LVR)

LVR is a metric that lenders use to assess risk. It compares the loan amount to the property’s appraised value. A lower LVR often results in more favorable loan terms, while a higher LVR may attract additional costs such as Lenders Mortgage Insurance.

5. Deposit

The deposit is your upfront financial contribution to the property purchase, typically 20% of the property's value but can range from 2% to 20%, although when putting up a lower deposit this may incur additional costs such as Lenders Mortgage Insurance (LMI). On the other hand, deposits can be more than 20%, as a result of the higher deposit, this can reduce your LVR and provide access to more favorable lending conditions.

6. Lenders Mortgage Insurance (LMI)

LMI is a one-time insurance premium that protects the lender in the event of default. For investors with a deposit below 20%, LMI becomes a necessary cost, though strategic use of equity or savings can help avoid this expense. Not to be confused as a cost to the lender for protecting them, the cost is in fact the responsibility of the borrower.

7. Offset Account

An offset account is a feature-rich tool for managing your home loan. It allows you to reduce the interest on your mortgage by offsetting the loan balance with the funds held in the account. For investors, this can mean significant long-term savings on interest repayments. This is a separate account to your loan, and in some instances, you can have multiple offset accounts against one loan.

8. Redraw Facility

A redraw facility is a loan feature available on certain lending products and loans that allows you to access any extra payments made towards your loan, which can assist with providing liquidity when needed. This flexibility can be advantageous in managing unexpected property expenses or reinvesting in additional assets.

9. Equity

Equity represents the difference between the market value of your property and your outstanding loan balance. As your property value appreciates, this equity can be tapped into for future investments, used as a deposit to secure and expand your property portfolio, renovations, or other personal purchases.

10. Negative Gearing

Negative gearing occurs when the costs associated with your investment property (e.g., mortgage interest, maintenance) exceeds the rental income. This loss can be offset against other taxable income, offering a potential tax benefit for investors with high-yield properties. For advice around Negative Gearing and tax benefits, be sure to speak to a Tax Professional.

11. Positive Gearing

Positive gearing is when your investment property’s income exceeds expenses. This results in immediate profit but may attract higher tax obligations. Managing the balance between positive cash flow and tax efficiency is critical for long-term investment growth. For advice around Positive Gearing and tax efficiencies, be sure to speak to a Tax Professional

12. Capital Gains Tax (CGT)

CGT is the tax applied to the profit made from selling an investment property. Careful timing and the use of exemptions, such as the principal residence exemption, can reduce CGT obligations. For advice around Capital Gains Tax, exemptions, and obligations, be sure to speak to a Tax Professional.

13. Stamp Duty

Stamp duty is a state-imposed tax on property transactions. It can significantly impact the overall cost of purchasing a property, and exemptions may apply in certain situations, particularly for first-home buyers.

14. Fixed Interest Rate

A fixed interest rate locks in your repayment amounts for a specified period, often ranging between 1-5 years, offering predictability in managing your mortgage and cash flow. It can be a prudent choice in times of economic uncertainty, but can also impact your ability and cost if considering a refinance or moving away from your lender.

15. Variable Interest Rate

With a variable interest rate, your repayments fluctuate based on changes to the market rate. While this offers flexibility and the potential for lower rates, it also comes with the risk of increased repayments during times of rate hikes and uncertainty around cash flow. It's important to keep an eye on the cash rate if you are on a variable interest rate, subscribe to our RBA updates here.

16. Split Loan

A split loan allows you to enjoy the best of both worlds: part of your loan is fixed, and the other is variable. This provides a level of security while allowing for flexibility in repayments, and gives you an opportunity to make the most of your loan.

17. Refinancing

Refinancing involves replacing your current mortgage with a new one, often to secure a lower interest rate or access equity for further investments. Timing your refinance can result in significant savings and better loan terms, if you are considering moving to a new lender, reducing your repayments, consolidating multiple debts, or accessing equity then it's best to speak to a broker for your options.

18. Pre-Approval

A pre-approval gives you an indication of how much you can borrow, providing a level of certainty when shopping for property. It streamlines the purchasing process and strengthens your position when making offers. Various lenders have their own timelines for how long a pre-approval lasts, so make sure you are ready to start looking when you start your pre-approval process.

19. Interest-Only Loan

Interest-only loans are typically used by investors to reduce short-term repayments. For a set period, you only pay the interest on the loan, allowing you to manage cash flow or invest in additional properties. Usually the interest-only term is around 5 years, and repayments will transition to principal and interest after the assigned interest only period.

20. Principal and Interest Loan

With a principal and interest loan, you reduce the loan amount over the term of the loan while also paying the interest component. This repayment can be a fixed or variable interest rate, however the repayment amount is made up of both principal and interest in the one payment. This repayment structure builds equity in your property and is ideal for long-term ownership strategies.

21. Rental Yield

Rental yield measures the return on investment from a rental property, calculated as a percentage of the property’s value. It’s a critical metric in assessing the profitability of an investment property.

22. Cash Flow

Cash flow is the net income generated from a property after expenses like mortgage repayments, maintenance, and taxes. Positive cash flow properties provide regular income, while negative cash flow properties may offer tax advantages.

23. Strata Fees

Strata fees, often referred to as Body Corporate, are regular payments made by owners of units or apartments to cover maintenance of shared areas in the property complex. These costs should be factored into the overall profitability of a property investment.

24. Depreciation

Depreciation allows property investors to claim a tax deduction for the decline in value of their property and its fixtures over time. It applies to the building itself, as well as assets like appliances and fittings within the property. Investors can use a depreciation schedule—a report created by a qualified quantity surveyor—to detail the deductions available each year. This schedule maximizes tax benefits by outlining how much you can claim on these depreciating assets, ultimately reducing taxable income and increasing cash flow.

25. Loan Term

The loan term is the length of time over which your loan is scheduled to be repaid. A longer loan term can reduce monthly payments but increase total interest paid, while a shorter loan term can lead to higher monthly payments with less interest overall. Most loan terms range between 25-30 years, but can be longer or shorter depending on the circumstances around the loan amount, borrowers, and asset being used as security.

Did you want to find out how you can reduce your interest rate, explore refinancing options, or tap into equity to expand your property portfolio? Schedule a call, online meeting, or face-to-face with Keith here. Alternatively, feel free to email our team at myteam@havenpf.com to learn more about how we can help you achieve your property goals.