How to understand common mortgage and property terms
Getting a mortgage can be a huge and overwhelming experience. If you don’t really know what the process is like or have any experience with mortgages, then navigating your way around the complication terms and phrases can be challenging, too. Following are a few of the most common mortgage and property terms, and how they may apply to you.
When you apply for a home loan, you are not expected to completely pay it off all at once – obviously! The amortisation period (along known as the loan term) is the length of time – usually number of years – that it will take for you to fully pay off a home loan. In Australia, this is generally 30 years, though it can be negotiated from 25-40 years.
Annual Percentage Rate
You cannot expect the amount of your loan to remain constant during your loan period. The rate charged for your loan every year is called the annual percentage rate or APR and depending on your loan type, it may vary. It is expressed as a single percentage value and represents the actual yearly cost of funds over the term of your loan. A variable loan rate may change, while a fixed loan will have a set interest rate for the fixed rate period.
Capital Gains Tax
Also known as CGT, capital gains tax is the tax that you pay when you sell an investment property – but only if you made a profit out of it. It forms part of your personal income tax, so it is not considered as a separate tax. If you lost money from the property you sold instead of gaining profit, you can declare a loss. You can then carry the loss forward and deduct it against future capital gains.
Lenders Mortgage Insurance
Lenders mortgage insurance (LMI) is an amount payable by borrowers when you have a deposit of less than 20%. It covers insurance on behalf of your bank or lender, to guarantee them that the loan will be repaid, even if stopping making repayments. It is important to note that even though you pay for this policy, it doesn’t protect the borrower, it protects the banks. You can often pay for this premium as part of your loan ie. have the cost added to your loan, rather than paying for it upfront.
Negative gearing is when the earnings from your investment property are less than the costs associated with the investment. This shortfall can be deducted from individual tax liability, and it is used by many high-income people to reduce their taxable income.
Positive gearing is when the earnings from your investment property are more than the costs associated with the investment. This additional income is often known as ‘positive cashflow’ and it must be declared at tax time as income.
The yield is a measurement of the income of an investment property. It is calculated annually as a percentage of the cost of a property. For investors, this figure is important as it helps them to ascertain the profitability of a property investment.