What is Lenders Mortgage Insurance (LMI)
Written by Kim Skilton | Mortgage Broker
In this Article:
What is Lenders Mortgage Insurance?
The short answer: Lenders Mortgage Insurance (LMI) is a cost you pay when your deposit is less than 20% of the property's value. It protects the lender — not you — and it can add a significant amount to the total cost of your loan. The good news is that there are several ways to avoid it, or at least reduce it. This guide covers everything you need to know.
Lenders Mortgage Insurance is an insurance policy taken out by your lender to protect themselves if you default on your loan and the property sale doesn't cover the outstanding balance.
A few important things to understand about LMI before we go further:
It protects the lender, not you. Despite the name, LMI does not benefit you as a borrower.
You pay for it. Even though the policy protects the lender, the cost is passed on to you.
It's a one-off premium, paid at settlement. In most cases it's capitalised meaning that it is added to your loan balance, rather than paid upfront.
It's not transferable. If you refinance with a different lender, you may need to pay LMI again depending on your equity position.
When do you have to pay LMI?
The trigger is your Loan to Value Ratio (LVR). Your LVR is the amount you're borrowing expressed as a percentage of the property's value. LMI is generally required when your LVR exceeds 80%. In other words, when your deposit is less than 20% of the purchase price.
For example: if you're buying a property worth $600,000 and your deposit is $90,000 (15%), your loan would be $510,000 representing an LVR of 85%. In this example, the borrower would be required to pay LMI.
LMI applies whether you're buying your first home, your next home, or an investment property. It also applies to construction loans and purchases of vacant land.
How much does LMI cost?
LMI isn't a flat fee.The premium is calculated based on three things:
Your loan amount
Your LVR (the higher the LVR, the higher the premium)
Which lender and LMI provider is used
As a general guide, LMI on a smaller loan at a lower LVR might be a few thousand dollars. On a larger loan at a higher LVR, it can run to tens of thousands. Because LMI is typically capitalised into the loan, you also end up paying interest on that amount over the life of the loan which increases the true cost beyond the headline premium figure.
One thing that often surprises people: different lenders charge different LMI premiums even on the same loan. The lender's choice of LMI provider and in some cases their own internal risk fee can mean a meaningful difference in what you're charged. This is one area where having a broker compare lenders across the full panel genuinely saves you money.
Should I pay LMI or wait until I have a 20% deposit?
This is one of the most common questions I get, and there's no single right answer. It depends on your situation.
The case for waiting: a 20% deposit eliminates LMI entirely, which can be a meaningful saving. It also gives you a lower LVR from the start, which can mean better interest rate options and lower overall interest paid.
The case for buying sooner with LMI: in a rising property market, the cost of waiting — particularly in Queensland and Northern NSW where property values have continued to grow can outweigh the cost of the LMI premium itself. If property values increase significantly while you're saving, you may end up needing a larger deposit than you started with, and the gap may never close.
There's no formula that works for everyone here. What I do is run the actual numbers for your situation, comparing the cost of LMI against the likely cost of waiting, so you can make an informed decision rather than guessing.
Five ways to avoid paying LMI
1. Save a 20% deposit
The most straightforward path. If your deposit reaches 20% of the purchase price, LMI is not required. The challenge is that in most Australian capital cities, 20% of a median-priced property is a substantial sum, and the time required to save it means the market can move in the meantime.
That said, it remains the most cost-effective option if your timeline allows for it. As a qualified Mortgage Broker I can help you work backwards from your target property price to understand exactly how much you need and when you might realistically get there.
2. Use a government deposit guarantee scheme
The federal government operates schemes such as the First Home Buyers Scheme that allow eligible buyers to purchase a home with a deposit of as little as 5% without paying LMI. Under these arrangements, the government guarantees a portion of the loan, which removes the LMI requirement for the borrower.
These schemes have eligibility criteria including income thresholds, property price caps and residency requirements, and places are limited each financial year. The specific schemes available, their eligibility criteria and their property price caps are updated regularly, so it's important to check the current details directly with Housing Australia or ask your broker.
As your broker, I'll check your eligibility for any applicable government scheme as part of our initial conversation, and help you navigate the application process if you qualify.
3. Use a guarantor
A guarantor arrangement allows a family member, usually a parent, to use the equity in their own property as additional security for your loan. This reduces your effective LVR, which can eliminate the LMI requirement even if your deposit alone is less than 20%.
For example: if you have a 10% deposit and a parent guarantees the remaining 10%, the lender may treat the loan as if it has a 20% deposit in place, removing the LMI requirement entirely.
Guarantor arrangements carry real responsibility for the person providing the guarantee. I always recommend that any potential guarantor obtain independent legal advice before proceeding, and I can help facilitate that conversation.
4. Certain professions may qualify for an LMI waiver
Some lenders offer LMI waivers or reduced premiums to borrowers in specific professions. Medical professionals are the most common group such as doctors, dentists, veterinarians and optometrists who are often eligible to borrow up to 90% LVR without LMI. Some lenders extend this to lawyers, accountants, and other high-income professionals.
The qualifying professions, maximum LVRs and conditions vary significantly between lenders. If you work in one of these fields, it's worth asking your broker whether you qualify.
5. Lender risk fees as an alternative to LMI
Some lenders don't use traditional LMI at all. Instead, they charge their own internal risk fee, sometimes called a Reduced Equity Fee (REF) or Low Deposit Premium (LDP), which serves a similar purpose but is handled entirely within the lender's own risk process.
Whether a lender's risk fee works out better or worse than a standard LMI premium depends on the loan and the lender - another reason to compare across the panel rather than going with the first lender you find.
How to reduce LMI if you can't avoid it
If none of the avoidance strategies above apply to your situation, there are still ways to reduce the premium you pay.
Find the LVR sweet spot
LMI premiums don't increase in a straight line, instead they jump at certain LVR thresholds. This means that in some cases, increasing your deposit by a relatively small amount can reduce your LMI premium by significantly more than what you put in.
The most common sweet spots occur at LVRs of 88%, 90% and 92%. If your current LVR sits just above one of these thresholds, it may be worth finding a small amount of additional deposit to push you below it. I run this comparison as a standard part of the process for any client who will be paying LMI.
Compare lenders - premiums vary
Different lenders use different LMI providers, and different providers charge different premiums. The premium for the same loan can vary by hundreds or even thousands of dollars depending on which lender and provider is used.
This is one of the advantages of working with a broker rather than going directly to a single lender: I can compare LMI premiums across the panel as part of finding the right loan for you.
Don't cross-collateralise loans
If you own multiple properties, keeping your home loan and investment loan with separate lenders prevents the bank from treating the combined position as a single security. Cross-collateralising loans can result in a higher effective LVR across your portfolio, which may trigger LMI on a loan that wouldn't otherwise require it.
What happens if I default - does LMI protect me?
No, it does and this is the most important thing to understand about LMI. It protects only the lender.
If you default on your loan and the lender sells your property at a loss, the LMI provider compensates the lender for the shortfall. You remain liable for any remaining debt, and the LMI provider may pursue you for repayment of any amount they've paid out to the lender.
LMI is sometimes confused with Mortgage Protection Insurance, which is a separate product that protects the borrower against events like illness, injury or unemployment. That is a genuinely borrower-focused product whereas LMI is not.
Ready to find out what I can do for you? Book a free, no-obligation call with Maison Mortgages. I'll explain exactly what I can access on your behalf and what the process looks like from here using our simple 5 Step Haven Settlement Success process.
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice.