Essential property terms
We've put together an easy-to-read table to explain mortgage terms and abbreviations. Whether you're new to home buying or it's just been a while, understanding these words is extremely important. Let's make your property journey smoother by clearing up any confusion.
| Term | Meaning | Description |
|---|---|---|
| Body Corporate / Strata Title | In a Body Corporate or Strata Title arrangement, individual property owners collectively own the entire property, and each owner holds a title for their specific unit or lot. The common areas, such as hallways, elevators, and shared facilities, are collectively owned by all the property owners. Regular fees, known as strata levies or body corporate fees, are often paid by individual owners to cover shared expenses and maintenance costs. | |
| CGT | Capital Gains Tax | This is a tax on the profit made from selling an investment property where the sale price is higher than the original purchase price. |
| CoS | Contract of Sale | The Contract of Sale outlines the terms and conditions agreed upon by the buyer and seller. It includes details such as the property's price, settlement date, any special conditions, and other important terms of the sale. |
| Deposit | The required deposit is at least 5% of the property's value, in addition to covering purchase expenses. For instance, for a $500,000 property, a 5% deposit equals $25,000. Yet, considering extra costs including stamp duty, which could be around $25,000 (except for first home buyers below $600,000), your total contribution should include the minimum 5% deposit and these associated purchase costs. | |
| Equity | The difference between the value of your property and the mortgage. For instance, if your property is valued at $500,000 and your mortgage is $300,000, your equity would be $200,000 (if sold). To borrow this equity for other purposes you may have a limit, often up to an 80% Loan-to-Value Ratio (LVR). This means you could potentially borrow an extra $100,000 up to an 80% LVR without incurring Lenders Mortgage Insurance (LMI). | |
| Fixed | Refers to an interest rate on a loan that stays the same for a specific period, such as five years. It's like having a fixed monthly bill, which can be helpful because you always know how much to budget. | |
| I/O | Interest Only | It's a type of loan where, for a certain period, you only pay the interest on the amount you borrowed and not the actual borrowed amount (the principal). |
| LMI | Lenders Mortgage Insurance | It's like a safety net for the lender, not you. If you can't put down a large enough deposit, and your loan is more than 80% of the property's value, the lender will ask you to get LMI. This insurance protects the lender in case you can't pay back the loan, but you're the one who pays for it. This is a one off payment at settlement, not an annual fee. |
| LVR | Loan to Value Ratio | The Loan-to-Value Ratio (LVR) represents how much money you borrowed compared to how much the property is worth. For example, if you get a $400,000 loan to buy a $500,000 house, your LVR is 80%. This means the loan is 80% of the house's value. |
| Negative Gearing | It is a situation in property investment where the costs of owning a property, such as mortgage interest, property maintenance, and other related expenses, exceed the rental income earned from that property. This results in a financial loss. The idea is that the losses incurred on the investment property can be deducted from the investor's total income, potentially reducing the amount of income tax they need to pay. | |
| Offset | An offset account is a type of transaction account linked to a home loan. The balance in this account is offset against the outstanding balance of the home loan when calculating the interest payable. Essentially, the money in the offset account works to reduce the interest charged on the home loan | |
| P&I | Principal and Interest | This is how you pay back your home loan. The "Principal" is the actual amount you borrowed, and the "Interest" is the extra cost for borrowing that money. |
| STCA | Subject to Council Approval | When you see ads saying a property can be developed 'Subject to Council Approval' (STCA), remember, it's not a guarantee. It just means it might be possible. Before you get excited, do your homework and check with the council to make sure you can go ahead with your plans. |
| Variable | Refers to an interest rate on a loan can change over time based on certain factors, like fluctuations in the financial market and Reserve Bank of Australia (RBA) decisions. So, if you have a loan with a variable interest rate, your monthly payments might go up or down as the interest rate changes. | |
| Yield | Signifies the percentage return on an investment and is frequently calculated by dividing the annual rental income by the property's current market value. For instance, if your investment property, valued at $500,000, generates $25,000 in annual rent, the yield is 5% (calculated as 25,000 divided by 500,000, multiplied by 100). |
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