What’s going on guys Its Jordan de Jong here and today I want to cover a few terms that you may be unsure about, the four terms we’ll be covering today as you may be able to tell from the title is capital growth, equity, LVR and LMI, these terms are thrown around quite heavily in the property space and rely on each other to calculate. Firstly, capital growth is the value increase of your property over time, capital standing for the asset, or in this case, the property and growth are pretty self-explanatory. So, say we purchased a house 3 years ago for $500,000 and today it is valued at $600,000, we can calculate our capital growth by calculating the difference between these two numbers, being $100,000. This amount is often put in the context of equity, where you might hear something along the lines of “We have gained an addition $100,000 of equity in our property.” Which is definitely true, but it should not be confused with the total amount of equity in your property, equity is essentially the total amount that you own of the property. To calculate the total amount of equity in your property, you take the current market value of the property and minus the amount outstanding that you owe to a lender, using the same example as before, let’s say you originally borrowed $400,000 from the bank to buy the property and over that same 3 year period you had paid down the debt to $380,000. So, in this scenario, we would use the current market value of $600,000 and minus the amount outstanding, which is $380,000, giving us a total equity calculation of $220,000 for this specific property. This leads us to LVR also known as Loan to Value Ratio, breaking this down it’s essentially the percentage of our loan in comparison to our total property value, so we are using the same two figures here as equity, but calculating it as a percentage instead of a straight value. Taking our existing numbers, we can calculate our LVR by taking our amount outstanding of $380,000 and divide that by our total property value of $600,000 and times that by 100, giving us a 63.3% Loan to Value ratio. Now let’s go back to when we first purchased the property 3 years ago and calculate our LVR back then, so our initial mortgage was $400,000 and our property value was $500,000, giving us a Loan to Value Ratio of 80%, so we can see, over time as the value of our property increase or our debt decreases, our loan to value ratio as a percentage comes down. Up until this point we covered three of the four topics which were essential to an understanding before we delve into the last one, but just before we get into it, if you are loving this content and have found it valuable don’t forget to smash that like button! Our last term is LMI which stands for Lenders Mortgage Insurance, now this is commonly confused as being insurance for you in the worst-case scenario that you can’t pay your mortgage repayments, but in actual fact, this is insurance for the lender for that exact same scenario, that we actually have to pay for. Typically, loans greater than an 80% LVR trigger Lenders Mortgage Insurance, except for in the case where a government grant or policy allows you to borrow a higher than 80% LVR, this threshold is put in place because it’s much riskier for the banks to loan out on a higher than 80% LVR. For example, If you had to sell the property due to unforeseen circumstances in a low property market, with an 80% LVR they have 20% buffer of the property price to ensure that the outstanding loan amount gets paid out in full, once the property has been sold. Going back 3 years ago to our $500,000 property, remember we purchased it on an 80% LVR, so we didn’t have to pay lenders mortgage insurance, meaning we used a 20% deposit of $100,000 to secure the property, which, at that point in time is also out total equity amount. So, in the worst-case scenario of a falling property market if we had to sell at a quick sale of say $450,000, meaning we actually lost money on the property, which does happen. The banks will use $400,000 first to pay off the outstanding loan, and then you’re left with a measly $50,000 leftover. However, now imagine if we had purchased the property on a 95% LVR and the total loan on the property, to begin with, was $475,000, In the same scenario of selling the property at $450,000 we would now be short $25,000 to pay the bank back in full, and this is essentially the shortfall that lenders mortgage insurance covers. Calculating lenders mortgage insurance premium is different in every state, so to calculate it I would highly recommend asking your mortgage broker or using an online calculator to do so, for a rough guide you can use this table here to gauge how much you might be up for. LMI is a one-off payment typically due when you settle your loan, which can also go towards your total loan amount, meaning you are increasing the debt amount by the LMI premium and have to pay interest on that additional amount if we choose to put it against the loan. I’ll be doing more blogs like this, giving a high-level explanation of specific terms and putting them in together with other related terms to give them some context and explain what they mean, do you have any other terms you would like me to explain? As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

DISCLAIMER: No Financial, Property Buying, Legal, Taxation or Accounting Advice The Listener, Reader or Viewer acknowledges and agrees that: Any information provided by me is provided as general information and for general information purposes only; I have not taken the Listener, Reader or Viewers personal and financial circumstances into account when providing information; I must not and have not provided legal, financial, property buying, accounting or taxation advice to the Listener, Reader or Viewer; The information provided must be verified by the Listener, Reader or Viewer prior to the Listener, Reader or Viewer acting or relying on the information by an independent professional advisor including a legal, financial, taxation, accounting and property buying; The information may not be suitable or applicable to the Listener, Reader or Viewer's individual circumstances; I do not hold an Australian Financial Services Licence as defined by section 9 of the Corporations Act 2001 (Cth) and we are not authorised to provide financial services to the Listener, Reader or Viewer, and we have not provided financial services to the Listener, Reader or Viewer.