Key terms: Building a stronger financial future

Financial freedom doesn’t happen overnight, it’s built on a foundation of knowledge, smart strategy, and trusted guidance. Whether you’re entering the market for the first time, looking to expand your investment portfolio, or simply want to strengthen your financial literacy, understanding key property-related terms is essential.

Here’s a glossary of the most important terms in property and wealth creation:

Debt Recycling

A strategy that involves converting non-deductible debt (like your home loan) into tax-deductible investment debt over time. It can accelerate wealth creation when used wisely, but it also carries risks that require professional advice.

Borrowing Capacity

This is the amount of money a bank or lender is willing to lend you. It’s calculated based on several factors, including your income, expenses, savings, debts, dependents, credit history, and whether you’re applying solo or with a partner. Knowing your borrowing capacity is a smart first step before you begin house hunting.

Pre-approval

Pre-approval (sometimes called conditional approval) is when a lender gives you an indication of the maximum amount, they’re likely to lend you, subject to certain conditions. It’s not a formal guarantee, but it provides clarity on your budget—and shows sellers you’re serious.

Guarantor

A guarantor is typically a close family member who agrees to use the equity in their own property as security for your home loan. This can help you enter the market sooner, with a smaller deposit and potentially without needing to pay Lenders’ Mortgage Insurance.

LVR (Loan to Value Ratio)

LVR is a key calculation used by lenders to assess risk. It’s the percentage of the property’s value that you want to borrow. For example, if you borrow $450,000 to buy a $500,000 property, your LVR is 90%. A lower LVR generally means lower risk for the lender and less cost for you.

Lenders’ Mortgage Insurance (LMI)

LMI is a one-off premium that protects the lender (not you) in case you default on your loan. It’s typically required if you’re borrowing more than 80% of the property’s value. LMI can often cost thousands, so avoiding it (by increasing your deposit or using a guarantor) can save you significantly.

Mortgage Protection Insurance

This optional insurance can help cover your mortgage repayments if you’re unable to work due to illness, injury, job loss, or death. It’s not required, but it can provide peace of mind, especially for families or single-income households.

Equity

Equity is the difference between the current value of your home and the amount you still owe on it. As your property value increases or you pay down your loan, your equity grows and can later be used as leverage for investment or renovation.

Passive Income

Income generated with minimal effort, such as rent from investment properties, dividends from shares, or earnings from a managed fund. Passive income plays a key role in achieving financial independence.

Negative Gearing

An investment strategy where your rental property costs (loan interest, maintenance, etc.) exceed the income it generates. While this creates a loss, you may be able to offset it against other taxable income. It’s often used as a long-term strategy to build wealth through capital growth.

Depreciation

Depreciation refers to the decline in value of a building or its assets over time. For property investors, depreciation can be claimed as a tax deduction, potentially reducing your taxable income and improving your cash flow.

Leverage

Leverage means using borrowed money to invest in property. It can help you build wealth faster but also increases your exposure to risk. Having a clear exit strategy and understanding your repayment limits is crucial.

Offset Account

An offset account is a transaction account linked to your mortgage. The money in the account reduces the balance on which interest is calculated. For example, if your loan is $400,000 and you have $50,000 in your offset, you’ll only be charged interest on $350,000.

Cash Flow

Cash flow is the net amount of money moving into and out of your property portfolio. Positive cash flow means your rental income covers your expenses and loan repayments. Understanding your cash flow is key to maintaining a healthy investment strategy.

Superannuation

A long-term savings structure designed to support you in retirement. While often overlooked in early wealth planning, super can be a powerful tool when used strategically.