How much equity you need to buy an investment property?

With low interest rates and increased bank lending, now is a great time to access some of your home’s equity to buy an investment property in Perth, Australia. But how much equity do you need?

How much equity you need

Let’s assume you own your own home and you now want to buy an investment property.

You need 20% of the new property’s purchase price to avoid paying mortgage insurance.

For example, say your intended property costs $500,000. You need $100,000 equity in your home, plus enough money to cover the stamp duty. So you need $125,000 in equity.

Understanding mortgage insurance

Basically, banks need to insure their risk of borrowers not being able to pay their mortgage. The higher the percentage of the purchase price you borrow, the higher the risk for the bank.

If you borrow more than 80% of a property’s purchase price, you have to pay mortgage insurance. For example, if you have a 10% deposit and need to borrow 90% of a $500,000 purchase, you have to pay $8000 to $10,000 in mortgage insurance. (Even with this cost, the total borrowing must be less than 90%.)

This insurance amount gets added to the total loan and you pay it off with the mortgage.

Therefore, to avoid mortgage insurance, most borrowers try to borrow no more than 80% of the purchase price.

Want to know more?

If you have any queries or would like more advice on purchasing an investment property, contact Alan Bourke or anyone from Bourkes on (08) 9474 2000.

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