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Many investors buying an investment property find themselves confused with all the investment property jargon flying around in the market. As first time investors may find it difficult to understand, here’s a handy guide decoding the 10 most common investment property loan terms any investor will come across:

Investment-Property-Terms-Explained

1. Debt Consolidation –

Consolidating all your debts such as home loan, credit card debt, personal debt and utility bills into one single monthly repayment can help you pay off your debts in case you are struggling with financial problems. Debt consolidation is a good strategy for long-term credit, however, paying short-term credit card loans over a longer period of time may end up being more expensive.

2. Debt Recycling –

Debt recycling is a strategy to minimise your tax liability, reduce your home loan and build an investment property portfolio. It refers to recycling your non tax deductible home loan into tax deductible investment loan by using your family home to fund your investment loan (that is tax deductible) and using the earnings from the investment property to pay off the mortgage.

3. Debt Service Ratio –

Debt Service Ratio is another term that lenders use to determine the serviceability of the loan. It expresses borrowers’ monthly recurring debts as a proportion of their monthly income and lenders don’t want this figure to exceed 30-35% of monthly income.

4. Debt-to-income Ratio (DTI) –

Lenders use Debt-to-income ratio or DTI to determine a borrower’s ability to repay the loan. It is the ratio of total monthly recurring debt to monthly income expressed as a percentage. A high DTI may make lenders wary of lending to you.

5. Land Content Ratio (LCR) –

Land is the real wealth as buildings depreciate over time but land increases its value. Land Content Ratio refers to the price of the land where your investment rests compared to the total investment. It is prudent to ensure a chunk of the investment comes from land.

6. LVR –

Loan to Value Ratio or LVR is the most commonly used word in the home loan market. Simply speaking, it is the ratio of the loan amount you seek to borrow compared to the value of the property you intend to buy. While lenders are generally comfortable lending if your LVR is less than 80%, it is possible to borrow more than 80% of the property’s value by paying Lenders Mortgage Insurance (LMI) or having a parent guarantee. Before you apply for a loan, check your borrowing capacity by using this borrowing capacity calculator.

7. Principal Place of Residence (PPR) –

Jointly or solely owning the home where you live makes it your Principle Place of Residence or PPR, which is an important consideration for taxation purposes as the ATO may allow exemption (in certain conditions) on Capital Gains Tax (CGT) for your PPR.

8. Product Disclosure Statement (PDS) –

A PDS is an important document (approved by ASIC) for investors providing a detailed overview of a financial product including rates, fee, and other associated risks and benefits.

9. Return on Investment and Return on Equity –

ROI and ROE are important measures of profitability of an investment. While ROI refers to the ratio of total returns divided by total investment expressed as a percentage, ROE is the ratio of total returns divided by investor’s equity expressed as a percentage. So a high ROI or ROE indicates a great investment. In case you are confused, the similarly termed ROC refers to Return on Cost of something.

10. Self Managed Super Fund (SMSF) –

SMSF or Self Management Superannuation Fund is a trust set up with the sole purpose of providing for your retirement. Here, the members are also the trustees and personally responsible for running the fund. Through SMSF, you can not only invest in shares but also invest in property.

 

As interest rates rest at a historic low, it is the right time to buy a piece of your Australian dream. Invest wisely by choosing to invest in one of these next booming suburbs. You may grab a free property report to know everything that matters about real estate in your chosen suburb.

Gain more from your investment by bagging a great deal – compare investment property mortgage rates on HashChing for the most competitive deals in the market.

By Vidhu Bajaj

 

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