Adjustments

The process of allocating expenses such as council rates and water rates that the seller of a property has paid for but not used and that the buyer of a property has to effectively repay to the seller once the home loan settles and ownership of the property transfers.

Cross Collateralisation

This when a lender uses your property (whether owner occupied or an investment) as security for other property that you purchase. It is generally considered to be something that a borrower should avoid at all costs.

Depreciation

Depreciation is an accounting term and describes the general wear and tear of an asset. When talking about an investment property, depreciation can apply to both the actual building as well as to contents such as the oven, air conditioning and so on. Depreciation is an important factor in property investing as it allows an investor to increase the expenses of owning the investment property and therefore reducing the profit (or increasing the loss) without having to actually pay the amount of the depreciation. This allows the property owner to pay less income tax. Further information can be obtained from the ATO website.

Equity

Equity is the difference between what your property is worth and the amount that you owe by way of a mortgage. For instance, if the property is worth $500,000 and your loan debt is $425,000, then your equity is $75,000. Equity can be used as genuine savings as outlined below.

FHOG

Acronym used as an abbreviation for the First Home Owners Grant that is payable in Australia to eligible people. The FHOG is currently $7,000 although differing states of Australia offer other concessions or extra grants. The payment of the FHOG is also affected by the value of the property.

Formal Approval

This is issued by the lender once they are happy that a home loan application meets their lending criteria in all aspects. It is the final step in a home loan being approved and is followed by the issuing of the home loan documents to be signed.

Genuine Savings

This is a term that refers to the funds that a lender will require you to have saved. Every lender has a slight variation on what they deem to be genuine savings and how long you must hold the funds for but as a general guide, the following definition gives a good guide:

• Savings, either in a transaction, savings or term deposit account for at least 3 months
• Gifts are accepted provided they have been in the applicant’s account for greater than 3 months
• Deposits made into accounts from sale of Shares – provided the shares have been held in the applicants name for a minimum of 3 months
• Equity in an existing property cross-collateralized or funds drawn or sale proceeds.

Interest Only (I/O)

When a loan is Interest Only, the repayments being made only cover the interest that is due on the loan each month. The amount being borrowed remains the same month to month. Interest Only repayments can continue for a nominated period although there is now a product available on the market where repayments are only ever made for the life of the loan.

Interest Only remains are particularly possible for investors as it allows the maximum tax deductibility with the loan.

Loan to Value Ratio (LVR)

In simple terms, this is the percentage that is worked out by dividing the total home loan debt by the value of the property being mortgaged. If the total home loan debt is $400,000 and the value of the property is $500,000, then the LVR is 80%. The LVR is significant in that it can determine whether Mortgage Insurance is required or not.

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