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Understanding Mortgages & Property Investments

Investing is an exciting process. But if you’re not familiar with certain investment terminology, it can turn into a confusing one.

Put an end to that confusion with this handy Mortgage Definitions listing. At Investors Mortgage, we do our best to ensure that your loan application process is a stress-free one. Unfortunately, when it comes to something as

Important as money, legal terms often come into play and it becomes difficult to simplify key terminology in legal documents. As part of our effort to make life easier, we’ve put together a glossary of terminology. If you have any questions about these or any other terminology, please don’t hesitate to contact Amit - 0408005273. We’ll be glad to help.

A – Z Mortgage Definitions

TermDefinition
AmortizationRefers to the gradual reduction of debt through
Body corporateAn administrative body made up of all the owners within a group of units or
apartments of a strata building. The owners elect a committee that handles
the administration and upkeep of the site.
Bridging financeA short-term loan used to bridge the gap between buying a new property and selling an existing one.
 Profit made from the sale of the property.
Cash rate/Bank rate This is the tax you pay when you sell an investment property if you have made a profit.
CGT (capital gains tax)The cash rate is the rate at which the Reserve Bank of Australia sets interest rates. The
bank rate is the interest rate that banks offer and is above the cash rate to allow for a
profit margin.
Cash rate/Bank rateYou have a cash-flow positive investment if the incomings are more than your
outgoings after tax-deductible items have been claimed. You receive more rent than
your mortgage repayments, plus you are still ahead after taking into account items
such as interest on the loan, maintenance, insurance, land tax, rates, etc.
Cash-flow positiveYou have a cash-flow positive investment if the incomings are more than your
outgoings after tax-deductible items have been claimed. You receive more rent than
your mortgage repayments, plus you are still ahead after taking into account items
such as interest on the loan, maintenance, insurance, land tax, rates, etc.
CaveatA Caveat prevents future steps from being taken on a title without notice being given to the person entering the caveat (caveator).
Certificate of TitleA Caveat prevents future steps from being taken on a title without notice being given to the person entering the caveat (caveator).
Contract of SaleA legal document prepared by seller or agent, which is legally binding on both buyer and sellers when signed.
ConveyanceTransfer of ownership of a property from the seller to the buyer.
Cross Collaterisation (or
Securitization)
When the financial institution uses your property (whether owner-occupied or
investment) as security for other property you purchase.

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TermDefinition
DepositNon-refundable percentage (usually 5-10%) of purchase price paid by buyer when
contracts are signed and exchanged for the purchase of a property. The deposit must
be held by estate agency or seller’s solicitor in a trust account or held jointly in a trust
account by seller and buyer.
Depreciation ScheduleA depreciation schedule is a report that outlines the depreciation allowances that a
property investor is entitled to. Come tax time, you simply present your depreciation
schedule to the tax accountant completing your return.
Discharge papersUsed when refinancing, signed discharge papers release the security from one lender to the new lender.
Discretionary TrustA discretionary trust is generally a trust under which the distribution of income or capital to beneficiaries is made at the discretion of the trustee. Until the trustee exercises its discretion, the beneficiaries generally have no interest in the property of he trust. A discretionary trust is sometimes called a “family trust”.
EquityThe difference between the market value of the property and what is owed on the mortgage.
Fixed Interest RatesAn interest rate that remains unchanged for a set period of time.
Hybrid TrustA Hybrid trust is a cross between a discretionary trust and a unit trust. They have the
features of both trusts. There are different versions of this with Hybrid Discretionary
Trusts and Hybrid Unit Trusts.
Interest-onlyOnly repaying the interest charged on your mortgage, not paying anything off the principal or amount owing.
Land TaxCalculated on the value of a block of land and payable by owner/s.
Loan to Value Ratio
(LVR)
A ratio calculated by dividing the total borrowings divided by the total valuation of the
property expressed as a percentage.
Line of Credit (LOC)A line of credit is a type of finance product that enables you to unlock the equity in your home to make further investments.
Lenders Mortgage
Insurance (LMI)
Paid by the borrower to protect the lender against failure by the borrower to keep up mortgage repayments or to pay back the loan in full when it is due. Normally applies where the borrower’s loan exceeds 80% of the value of the property. The borrower remains liable for any shortfall (for example, if the property is sold and the proceeds don’t cover what is owed to the lender).
Low-doc loanThese are loans that don’t require as much documentation to set up the loan. They are
popular with self-employed people and those who have not yet established a credit rating.
MortgagorA person who gives a mortgage over the property as security for the loan.
Negatively gearedThis is where the incomings are less than your outgoings after all tax deductions have been claimed. For example, you receive rent on a property of $600 a month, but your mortgage repayments are $900 a month. Your shortfall is $300 a month, which you can claim as a loss when doing your tax return. Many people on high incomes use negative gearing to reduce their taxable income.
Non Recourse FinanceA particular type of finance where the lender does not require any personal guarantee.
Offset AccountAn offset account is similar to the traditional loan ( i.e. reducing your payments over time) however it has the added benefit of reducing the interest component of your loan by 100% of the amount you hold in your savings account, which is linked to your home loan.

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TermDefinition
Positively gearedThis occurs when the investment income exceeds your interest expense (and other
possible deductions). For example, the rent you receive maybe $1000 a month, but the monthly repayments are only $750. Note that you may be subject to additional tax on any income derived from a positively geared investment.
PrincipalThe amount of the loan itself without interest or other charges associated with the loan.
Private SaleAn owner sells a property without using an estate agent, thereby dealing directly with the buyer/s and saving an estate agent’s commission.
Rental yieldThe return on an investment as a percentage of the amount invested. Gross rental yield can be calculated by multiplying the weekly rent by 52 (weeks in a year), then dividing by the value of the property and multiply this figure by 100 to get the percentage.
SettlementThe final part of the loan process when the ownership of a property is transferred from seller to buyer because the balance of the property‘s sale price is paid to the seller.
ServicingQuite simply the borrower's ability to afford the loan. It takes into account factors like net income, living expenses and potential debt after the loan has settled.
Stamp DutyState government tax based on the sale price of a property, paid when property ownership is transferred.
Tenants in commonTwo or more buyers own a property with unequal shares and rights.
TrustA "Trust" holds property "in trust" for a natural person or persons, or for an incorporated body. In other words it may hold certain assets in trust for those people who benefit from the arrangement - called the "beneficiaries". It actually does not own the property - it's just holding on to it in trust - hence the name.
Unit TrustA unit trust is a trust in which the trust property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares. In an ordinary unit trust a beneficiary is entitled to the income and capital of the trust in proportion to the number of units held. A unit in a unit trust is really just a means of describing the share in the trust fund to which the unit holder is entitled.
Vacancy rateA measure of how many dwellings are available for rent over a specified time period. A low vacancy rate means there are not very many dwellings available for rent, while a high vacancy rate means there is ample supply of rental properties.
ValuationA written report of the estimated value of a property, usually prepared by a registered valuer.
Vendor (seller)Person selling a property.
Vendor’s termsRefers to instances when a property owner is prepared to offer a buyer finance or other assistance such as staged payments to assist with the purchase of the property (also known as “wrapping”).
Variable Interest RateA rate that varies according to Reserve Bank
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