July 10, 2017
Much like any other industry, the property and home loan market comes with its own terms and language that can be confusing for first time home owners, investors, or upgraders alike.
Our list looks at some commonly used financial terms and explains them in plain English to help keep you in the know throughout the home loan process.
1. Private Treaty
Most properties in Australia sell through private treaty. A private treaty is when the seller lists a property for sale with an asking price, commonly through a real estate agent. You then make an offer to the seller who decides whether to accept the offer.
Private treaties are in contrast to an auction, or a public sale in which properties sell to the highest bidder.
2. Contract of Sale
During the process of buying a property, you’ll need to become familiar with a Contract of Sale.
This is a document that outlines the terms and conditions under which you agree to buy, and the vendor agrees to sell, a property.
It will include details such as your offer, the agreed amount of deposit, and the settlement date. Importantly, it will also contain vital property information, such as a copy of the title documents, drainage diagram and the Zoning Certificate.
The contract of sale is usually compiled by your solicitor or real estate agent, and becomes legally binding once you, the buyer, signs the dotted line.
3. Lender’s Mortgage Insurance
If you are borrowing more than 80% of the value of a property, you will be required to pay Lenders Mortgage Insurance (LMI). This one-off insurance payment is designed to protect your lender if for any reason you can’t meet your repayments.
If applicable, you will need to pay your LMI before settlement and your lender may include the cost in your overall loan amount.
4. Cooling off period
Once you’ve signed a contract of sale, you’ll enter a phase known as the cooling off period. The cooling off period refers to the number of days you’re legally allowed to walk away from a property deal. If you’re planning on purchasing a property at an auction, note that there is no cooling off period for auctions.
The duration of the cooling off period varies from state to state. Tasmania does not acknowledge a cooling off period at all, while NSW and Queensland allow for five business days. The Northern Territory allows four business days, Victoria three, and South Australia two.
While a cooling off period may be a saving grace for some, you don’t necessarily walk away scot-free. Much like any other process, the cooling off period is subject to a formal procedure and a fee may be payable. This also varies from state to state. In Victoria, for example, you will be required to pay a fee set at 0.2% of the sale price. In NSW, it is 0.25%.
Equity refers to the value of an asset, minus any liabilities attached. In terms of property, it refers to the fair market value of your property, minus what you owe on your mortgage.
Equity can be accessed for a range of purposes – renovating or maintaining your property, as a deposit on an investment property, building other investments for your future or obtaining a few lifestyle perks – such as a new car or a much-needed holiday.
You can’t automatically access all your home equity. To qualify for refinancing, many lenders will require that you first have at least 20% equity in your home and they are unlikely to allow more than 95% of equity to be accessed.
6. Stamp Duty
Stamp duty is a charge applied by the state during the transfer of land or property and must be legally paid by you, the buyer, within 30 days of the exchange.
Stamp duty differs from state to state and depends on the market value of your property. It can also be applied to home loans, some insurance, and gifts.
To make sure you’re budgeting for the right amount on your next property purchase, you can use this online stamp duty calculator.
If you’re buying an investment property for income-producing purposes, you could be eligible to claim depreciation costs on that property.
Depreciation considers the impact wear and tear can have on the value of your investment property. Claimed against your taxable income, it can amount to beneficial tax savings, known as negative gearing.
There are two types of depreciation available – capital works and plant and equipment. Capital works is about construction and maintenance costs to the building itself while plant and equipment refers to elements inside your property, which could include carpets, window coverings or heating and cooling systems.
The amount of depreciation that can be claimed is based on the number of years your asset can be effectively used to produce income. To claim depreciation, you’ll need to have a tax depreciation schedule completed by a qualified quantity surveyor.
8. Torrens versus Strata Titles
Land titles were developed to simplify the recording and registering of land ownership in Australia.
Torrens Tile is the most common form of land ownership title in Australia and refers to ownership of both land and property. For example, your house and the land it sits on.
In contrast, Strata Title — common in the purchasing of units, townhouses and villas — covers ownership of the individual property as well as collective ownership of common areas, such as lobbies, lifts, pools and gardens. This means that you, along with other owners within the building, will be responsible for paying strata fees for the maintenance of common areas. This is usually managed through an owner’s corporation, also known as Body Corporate.
9. Body Corporate
Once you’ve purchased a unit, duplex, townhouse or any other sort of shared property, you’ll encounter the Body Corporate – a legal entity that is entrusted with the maintenance and management of common property on behalf of owners.
The Body Corporate also manages property budgets and creates its own set of rules for the property, known as bi-laws.
Rules, budgets and the amounts of fees payable by residents are usually agreed to during general meetings and through the Body Corporate Committee.
10. Capital Gains Tax
Naturally, when you’re selling an investment property, you’ll be looking to make a profit. The difference between what the property cost and what you receive when you sell it is known as a capital gain.
Capital gains are considered as part of your income and are subject to taxation through the capital gains tax (CGT). In Australia, since 1985 all assets have been subject to CGT, with the exemption of the family home and personal items such as your furniture and car, up to certain values.
Call Suzanne or Costa in the office on 02 9517 1818, or email firstname.lastname@example.org to discuss your options. Or, if you feel like dropping in at our office, we are now located at 557a King Street, Newtown NSW 2042. Be sure to share our blog on Facebook and let others join the conversation!