Material provided by W Financial
In the process of buying your first property, or any property for that matter, have you ever been totally baffled by the ‘finance lingo’? If the answer to that is YES then you’re absolutely not alone. Like your own work no doubt, every industry will have it’s own unique vocabulary that outsiders are challenged to make sense of and finance is no different. However we’ve found through our extensive experience as mortgage specialists, and especially through our own experience as investors, that sometimes the jargon can make you feel like you’ve walked into a minefield of vague acronyms. Feeling stumped by industry language that can make the process of investing seem a lot harder than it is.
This is why we’ve put all our heads together at W Financial HQ for you, referring back to all the challenges we’ve worked through with our clients to pool together the 11 of the most commonly misunderstood bits of industry verbiage, nouns, acronyms and even a mathematical formula that will give you the edge of understanding next time you’re talking finance!
Enjoy your new CHEAT sheet of finance lingo!
- BDM: A Business Development Manager is our contact at the bank we submit your application to who will be able to answer unusual queries, escalate the process where necessary and assist in navigating tricky situations (thankfully this last one doesn’t happen often).
- Deductable costs: Any cost or interest payment that was made for the purpose of investment that can be deducted. This is important if a loan is deductible as its better to be a separate loan to the ones that you can’t claim. Please always refer to your accountant for clarification.
- Offset Account: A type of loan facility where your transaction/savings account is linked to your home loan. Any balance in the savings account reduces the amount of interest charged on the loan balance. Note no interest is payable on the offset account. This is a helpful way to reduce your loan term and pay off the loan faster.
- Interest Only: This is where you only pay the interest on the loan. It is popular with investment properties for tax benefits, and usually has a term of 5 years, though some lenders will accept 10 years. There are also some advantages (if used wisely) to have your owner occupied home loan set up this way too. Especially when used with an offset account.
- COS or Contract of Sale: A legal document that details the conditions relating to the sale/purchase of the property. This document is legally binding when signed by both the vendor and buyer. The lender needs this with all purchase applications and valuations requests.
- Disbursements: The various costs your Solicitor or Conveyancer has to pay to other organisations and bodies on your behalf, including, for example, search fees and stamp duty/ land tax. Your Solicitor or Conveyancer will itemise the disbursements on the invoice they send you.
- Cross Collateralisation: This occurs when a lender links two or more properties together for lending purposes, and is also called cross securitising. Lenders cross collateralise the borrower’s properties for their own (the lenders) protection. There are no benefits to the borrower at all to do it this way. It is possible to get the same deal with the bank and not have your properties linked. In in some rare cases there may be a small benefit but there are more are disadvantages and risks to be aware of.
- LVR: A Loan to Value Ratio is a lending risk assessment ratio that lenders examine before approving an application. This ratio is the loan amount divided by the appraised property value, displayed as a percentage. LVR = Loan Amount/Appraised Value of the Property. Typically assessments with high LVRs are generally seen as higher risk, and therefore if accepted will generally cost the borrower more to borrow, or he or she will need to purchase lenders mortgage insurance.
- Valuation: A written assessment of how much a property is worth by a registered valuer. At the moment there can be up to 30% variance from one valuer to another. Its worth getting another valuation done if you don’t like the one you have received but the banks use a special system called Valex or VMS so it beneficial to work with a good broker than understands how they work and outline to you what your options are.
- Pre-Approval: A home loan pre-approval confirms how much you can borrow from your lender. It is conditional upon the property you wish to purchase being acceptable security, and your lender confirming your income and other information provided in your application. Some lenders only have a computer generated approval where nothing is checked but others have a full assessment undertaken. Depending on your circumstances would depend on which one you should use. These only last three months, but can be extended in some cases.
The world of finance can be a tricky one for any investor or homebuyer. No matter how seasoned a buyer you may be, finance applications can be taxing enough as is without getting stuck on little bits of jargon. Hopefully this will help you out for the future of your investment endeavours!
W Financial is a leading group of mortgage specialists run by award winning broker and successful investor Michelle Coleman. They’ve written over $500 million dollars in investor loans and the company maintains a stellar reputation, as group of intelligent, proven property investors themselves helping others become the same too.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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