As your mortgage broker, our mission is to help simplify and support you through the process of investing in property, which is why we’ve put together this handy list explaining the key lingo you’re likely to encounter. Right, students, pens at the ready, it’s time for some learning!

Bank valuation
A bank valuation is the bank’s estimate of the value of a property. When you apply for a home loan, your lender will send an independent valuer to appraise the property. The bank valuation is usually more conservative than the market value, because it’s designed to limit the lender’s risk and indicates the amount they can expect to recoup if the property is repossessed. It’s important to note that a bank will not accept your valuation of the property, even if you obtain your valuation from an independent valuer.

Capital gain
Capital gain is the term used to describe the profit on the sale of the property, once all expenses have been deducted. Capital Gains Tax (CGT) is applicable to capital gains on investment properties purchased on or after September 20, 1985, but does not apply to your principal place of residence in most instances.

The tax you pay is based on the sale price minus the cost involved in acquiring and holding the property (your cost base), and any gain is included in your assessable income in the financial year you sell the property. There may be several exemptions for paying capital gains tax (CGT). For example under the ‘Temporary Absence Rule’ – if you move out of your home and rent it out, the property may still be treated as your principal residence for up to six years and you are exempt from CGT. However, the exemption rules may vary from state to state, so it is wise to speak to your accountant about CGT and ask them to explain any exemptions that may be applicable to you.

Capital growth
Capital growth is the increase in value of the property over time. The supply and demand in an area impacts the capital growth. If there is high demand from buyers and limited supply, the prices are likely to rise.

Current market value
Not to be confused with the listing price, nor the most recent offer on a property, the current market value, as defined by The International Valuation Standards Council, is: “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”

Depreciation
Depreciation is the decline in the value of an asset over time. As an investor, you may be able to claim depreciation on the property buildings and the items within it against your taxable income, but again you should check with your accountant to see what tax deductions are applicable to you. In order to claim depreciation, you will need to employ a qualified Quantity Surveyor to prepare you a depreciation schedule. The tax office will not accept a depreciation schedule that you prepare yourself.

Equity
Equity is the current market value of a property minus any outstanding mortgage repayments. Investors can use the equity from the increasing value of an investment property to purchase a new property – if you are interested in doing this, talk to us about refinancing your current loan.

Lenders Mortgage Insurance (LMI)
This is a fee charged by lenders to protect themselves against borrowers who default, in case the net proceeds of a foreclosure do not cover the loan. LMI may be applicable to borrowers who do not have a deposit of 20% or more.

Loan-to-value ratio (LVR)
The LVR is the proportion of money borrowed versus the value of a property. Lenders take into account the LVR when assessing mortgage applications, as the lower the LVR, the lower their risk. Usually lenders will require you to pay LMI if they’re lending more than 80% of the value of the property.

Negative gearing
Negative gearing applies when the property’s expenses surpass the rent earned. These expenses can be used to reduce your taxable income. Positive gearing is when the rent exceeds the costs and the property pays for itself.

Rental yield
The rental yield is the annual rental income, expressed as a percentage of the property’s value. It’s often quoted when examining a property’s rental potential, and may be calculated as a gross percentage (before expenses are subtracted), or as a net percentage (accounting for purchasing or transaction costs). The rental yield can help investors determine the potential income and cash flow involved in purchasing a property.

Suburb growth
Suburb growth refers to the capital growth of properties within a particular suburb. As an investor, it a good idea to thoroughly research a suburb’s profile, including its capital growth potential, before purchasing a property.

Vacancy rate
The vacancy rate is the amount of properties vacant in an area. It is a useful way for investors to assess the rental demand of a suburb before purchasing. Investors usually prefer a suburb with a low vacancy rate, because it indicates a likelihood of being able to find tenants quickly and easily.

Zoning
Zoning refers to government laws specifying how property can be used. Properties may be zoned for residential, industrial, business, or other purposes. It’s important to be aware of zoning, as it affects the home loan you take out, capital growth potential, plus future renovation plans.

Investing in property is exciting, but it can also be confusing with so much new terminology to digest. We can help you make smart investment decisions and alleviate the stress by helping you decide the right structure for your property investment loan and by guiding you through the loan application and settlement process

Owning two properties is a great financial ambition and with Australian house prices on the rise, doing so has great potential to improve your financial situation in the long term. But please don’t be fooled – just because you have done it once before doesn’t mean it will be easy! Buying a second property also requires hard work, discipline and effort. Here are some financial pointers to help with the process of buying your second property.

1. 1. Property purchase purpose
      The first thing you need to understand is why you want to buy a second property. Are you planning to rent out your original property and buy something else to move into? Are you buying a ‘renovators dream’ to knock down and develop? Are you buying because you want a beach house and you will spend half your time in each location?

      Really understanding why you want a second property before you set out will help to inform all your other decisions in the property purchasing process. For example, if you are buying as an investment property, decisions around location, capital gain potential and rental yield will influence you in a different way than when you are buying something for yourself to live in.

   2. Your cash flow and budget
      There are no two ways around it – having a second mortgage is going to have a significant impact on your monthly cash flow! Ask yourself: can you easily service both mortgages? Do you have a stable income?

      Better still, keep a budget so you know what you can reasonably handle so you won’t over-extend yourself. The key here, and this is what a lender will look for, is your ability to earn enough to service both your first and second mortgage effectively, on top of the cost of living.

      It is important to fully assess and understand your borrowing capacity. (We can help you with this – just give us a call). As with any other home loan application, your second mortgage will be assessed on your income versus expenses. Lenders will look at your overall position of asset and liabilities, which means if you have any existing debts such another mortgage (which you do have), personal loans or credit cards, your borrowing capacity is going to be less, compared to if you were debt-free.

      When considering your cash flow and budget, it is also well worth including a ‘safety buffer’ contingency plan. This could be three to six months’ worth of repayments and living expenses, or similar, depending on your savings ability. It is important to have a safety buffer if you are hoping to use your owner-occupied property as security to fund the deposit for the second home.

   3. Will you be renting out one of your two properties?
      If the answer is yes, and for most of you we imagine that you are buying a second property for investment purposes, it’s essential to get a rental estimate for your second property before you make your purchase.

      If you are just in the research stage, having a rough estimate of rental income will help with setting your budget and understanding your cash flow (see point 2), but if you have chosen ‘the’ property to buy, most lenders will require a rental estimate letter from the real estate agent currently handling the property at the application stage.

      Lenders will factor in any possible rental income (if applicable) when determining your borrowing capacity, ensuring it is set at a safe limit – reducing your risk and theirs!

      When choosing a property for rental income, it’s important that the property is well located and will be easily tenanted so that it continues to generate income and support itself.

   4. Loan type & loan structure
      Interest rates have been very low for some time, which makes it a great time to consider buying a second property. And right now there are literally thousands of home loan options out there for you to consider. However, there are many variables to take into account when financing your second property purchase – so it’s a good idea to give us a call. Finding the right home loan product for your financing needs depends entirely on your current financial position and your short and long term goals. This is why the right advice is imperative when taking on a higher amount of debt across two different properties. It is best to speak to us about these options and the best way to structure your finances, before you even choose a property to buy, so you don’t get stung later on in the process. A few scenarios we could discuss include:

      Using your existing equity
      If you’ve lived in your first home for some time, there’s a good chance you have grown your equity. Equity is the difference between what your home is worth and how much you owe on it. For example, if your home is worth $550,000 and you owe $200,000 then you have $350,000 in equity.

      Tapping into this equity could give you a larger deposit for your second property purchase, which could be beneficial for your borrowing capacity and your overall budget. If you’re looking to do this, you will need to have your home revalued. In order to determine how much equity you have in your home, a lender will perform a valuation using an independent valuer before determining how much you can borrow and approving your loan.

Refinancing or staying with your current mortgage lender
Buying a second property offers the perfect opportunity to give your existing mortgage a health check. Use the opportunity to consider your home loan needs in relation to your future goals and ask yourself how well your current loan is performing for you. If you’re satisfied with the service your lender is providing and you have determined that the interest rate and fees you’re paying are competitive, there may be no need to refinance to another lender. However, there are some record low rates on offer at the moment and if you have had your mortgage for some time, it would be worth talking to us about what other home loan products are suitable for you and your goals.

Buying your second property is by no means a small task. We are here to help you with your financial goals, so please chat to us about how we can structure your loan so your second property purchase can really set you up for the future.

The answer is equity. It’s a hidden source of wealth that grows inside your property purchases over time. Equity is one of the biggest financial benefits of home ownership, a benefit that could allow you to turn your first home into a money tree that helps you finance property investment activities and build wealth for your future.

What is equity exactly?
Your equity is the difference between what your home is worth and what you owe on it. For example, if your property is worth $500,000 and you owe $400,000 then your equity is $100,000.
In order to calculate your equity position properly, you will need to establish the current market value of your home. You can do an estimate yourself by comparing your home to the price of similar homes that have sold in the surrounding area recently. If you would like a more accurate assessment of your home equity, you will need to obtain the services of a professional valuation expert.

How do you access your equity?
Once the equity in your home has increased, it may be possible to access it. Accessing your equity requires making an arrangement with a lender. There are several different ways you can go about accessing your equity. The options that are available to you will depend on your personal financial circumstances and goals, so you should talk with a professional mortgage broker about which method is right for you.

The two most popular options to access equity are to refinance your existing mortgage to extract a lump sum, or to establish a line of credit against the equity in your home. However, it should be noted that a lender will seldom allow you to borrow against all of the equity in your home, particularly if you still have a mortgage. They usually prefer to keep back at least 20% of the equity in your first home as security.

How can you grow your equity faster?
A popular strategy to grow equity quickly is to add value to your property. This can be achieved by renovating or expanding your home. You can often create quite large equity gains with a relatively small capital outlay and the equity increase occurs as soon as you have completed the project. Improving your property also tends to help it to continue to go up in value more readily over time – out dated properties, particularly run down properties, tend to experience less value growth because prospective buyers view them as fix-me-uppers and only want to pay a bargain price.

If your property is on a large block of land, you may even like to consider subdivision as a means of accessing the equity in your home. The subdivided block will acquire a value of its own, which you can borrow against to build. Or you can simply sell the block and access the funds.

What is the equity investment strategy?
When investing in property, time is your friend. Over time, the equity grows in your first property, which you can then use as a deposit to purchase a second property. This will mean that you now have two properties growing in value over time, which has the effect of growing your total equity position twice as fast. After a little more time passes, you can access more equity from the first two properties to invest in a third property, and so on.

Whilst you continue paying the mortgage on your first property yourself, your tenants pay the mortgages on your second property and any further properties you may purchase after that. Both the tenant’s financial contributions and home value growth in the marketplace continue to increase your total equity position. The more properties you own, the more quickly your total equity grows.

Are there any risks?
There are always risks associated with any kind of investment strategy. The danger is that you will borrow too much money and when interest rates go up, your tenant’s rental contributions will not cover your mortgage repayments and you may not be able to cover the difference from your own pocket. If a decline in property prices was to occur at the same time as an interest rate rise, you may find yourself in the position of having to sell off your properties at a considerable loss.

The way to mitigate these risks is to invest conservatively and always get the advice of a professional mortgage broker to help you determine how much you should borrow. They will help you take into consideration what could happen in the worst case scenario and help to make sure you don’t get caught out.

For more information about using the equity in your home to invest, please call us today. We’ll be happy to help you formulate an appropriate strategy that’s right for your personal financial situation and goals and help you to get started by helping you access your equity and by getting you pre-approval on an investment loan.