When you are making an important decision, such as buying an investment property, there is nothing worse than feeling overwhelmed or out of your depth. One thing that can cause things to start whizzing over your head is the use of jargon and industry-specific language. Unfortunately, the banking industry loves these terms, and the world of property purchasing and investment is full of them! A good property investment tip is to brush up on some of these banking terms and definitions before entering in any discussion where you need to be fully understanding what you are getting into.
Here’s a few banking terms and definitions to get you started:
The priority relates to the right a mortgager has over what is retrieved through the sale of the property. To avoid hassle later, a lender will often set out a higher priority than they have lent in case the customer wants to borrow extra in the future.
Consent to Second Charge Mortgage versus Deed of Priority of Land
Consent to Second Charge Mortgage
A consent to second charge mortgage occurs when a customer wants to take a second mortgage out on their property with a different lender. The original lender needs to agree to this first, and is registered on the land title as a memoriam of priority. It results in a formal agreement between the two companies. It sets out how much priority each lender has over the land.
Deed of Priority of Land.
This occurs when the customer already has two mortgagers but the priority on that mortgage needs to change. If one of the lenders lends more money to the client then that priority needs to be renegotiated between the two lenders. This is an informal document, but binding document and it supersedes the original ‘Consent to Second Charge Mortgage’.
Lending covenants are terms that Banks and financial institutes may include in loan documents should they think them necessary
Some popular lending covenants are:
LVR (Loan to Value Ratio) Covenant
This means that lending must remain below a set percentage of the property’s value.
Interest Cover Covenant
This means that interest cover on debt must be higher than a set figure, for example, 1.5x.
This is where the bank can stipulate that a new valuation is required at the customer s cost, at any point in time.
Also, Investment Property Tips has a Property Investment Glossary for you to look when you need to brush up on other property investment and banking terms and definitions.