Finance

Key terms of finance:

MORTGAGE: A loan that uses property (real estate) as security. The lender (bank, building society) holds the “Title” to the property and if the borrower falls behind with loan repayments, the bank has the right to sell the property.

PRINCIPAL: The amount borrowed from the bank.

INTEREST:  The amount that the bank charges the borrower for the use of the loan principal.

LEVERAGE or GEARING: The proportion of the value of the property that is lent. Example, if a property is valued at $100,000.00 and the bank, lends $80,000.00 then the leverage is at 80%

VALUATION of a PROPERTY: When a bank lends money on a property it will send a professional valuer to put a value on that property. This is not the price that the purchaser pays for the property, rather, the valuer compares the property to others in the local area and allowing for different finishes or location assigns a value. This will change up or down over time.

FIXED or VARIABLE INEREST: A fixed interest rate is a rate at which the bank fixes the interest charges for a specified time, generally between 1 and 5 years.
A variable interest rate moves up and down as the Reserve Bank varies the official cash rate,

INTEREST ONLY or REDUCIBLE LOAN: A reducible loan is where the regular repayments are greater than the interest and hence the principal is reduced and future interest charges are on the outstanding principal.

With interest only, the regular payments are only enough to repay interest charges and because principal is not being repaid the regular repayments are less. Investors who can claim tax deductions on interest payments, generally prefer interest only repayment.

We recommend that you seek your own independent advise when deciding what is best for you.