Negative Gearing? Equity? Amortisation? Confused by investment jargon?
Posted by Stephen McCarthy on Mon, Oct 31, 2011 @ 05:49 PM
The language of property investment can sound like confusing jargon for those unfamiliar with it. McCarthy Group can help you navigate the property investment waters, with simple, plain-English explanations of some of the more common terms.
Amortisation period: the number of years over which a loan is calculated and has to be repaid, including interest.
Bridging finance: a short-term loan that bridges the gap between when you need money (e.g. for a new property) and when you receive money (e.g. from the sale of an existing property).
Capital gain: the gross profit you have made, or the return on the amount invested.
Capital Gains Tax: The taxes you pay on the capital gain you have made, for example on the sale of an investment property. It is the slice of your profit that goes to the government.
Bank rate: the bank rate is the Reserve Bank of Australia’s official interest rate. It is currently 4.75%, which is the interest rate that the major banks will have to pay on their borrowings. (The banks lend the same money to for example an investor at 7%, with the difference between the two being their gross profit margin).
Cooling-off period: the time given to a buyer to legally withdraw from a property contract. The length of time varies in each of the states and territories.
Cross-securitisation/cross-collateralisation: when a financial institution holds some of your property as security against a loan.
Equity: the difference between your property’s market value and the mortgage being used to fund it. If your home is worth $400,000 and you owe $150,000, then your equity in the property is $250,000.
Fixed interest rate: where a loan is ‘locked in’ at a set interest rate for a specified period of time, e.g. a 7% interest rate fixed for four years.
Negative gearing: gearing is a term that refers to the added ‘investment power’ obtained through borrowed finance. Negative gearing explains a strategy where the amount of money flowing in from an investment (e.g. rent) is less than the amount flowing out (e.g. interest payments). The shortfall can be claimed as a loss and deducted from your taxable income. People on high incomes sometimes use negative gearing to reduce their tax.
Positive gearing: this occurs when the investment income exceeds your interest and other expenses. For example, when the rent received is higher than the mortgage repayments.
Off-the-plan: when you buy off-the-plan, you are buying a property before it has been built or completed. The plans and prospectus form the basis of what you will purchase for the agreed price.
Principal and interest: the amount borrowed from the bank or that still has to be repaid, plus the interest payable on the outstanding amount. The principal is the portion of a repayment that reduces the outstanding balance of a mortgage.
Property cycle: property values follow a cycle that includes periods of price growth followed by flattening or falling in values. The drivers of the growth cycles are supply and demand, and the availability and cost of finance. In spite of the fluctuations, the long-term trend in property values is upwards.
If you thought that property investing was only for the rich – think again. McCarthy Group has helped hundreds of ordinary Australians leverage the equity in their homes and secure their financial future through wise property investments. We have produced a FREE Guide covering the Frequently Asked Questions, or contact us for an obligation free consultation.