What Is Lenders Mortgage Insurance (LMI) in Australia and Can You Avoid It?
If you’re buying a home with less than a 20% deposit, there’s a good chance your lender will ask you to pay Lenders Mortgage Insurance.
“What is Lenders Mortgage Insurance and do I really have to pay it?”
It’s one of the most common questions first home buyers ask, and understandably so. LMI can add thousands of dollars to your home purchase costs. Here’s what it is, how it works, and when you might be able to avoid it.
What Is Lenders Mortgage Insurance?
LMI is an insurance policy that protects the lender, not you, if you default on your loan and the property is sold for less than the outstanding debt.
Despite the name, LMI does not benefit you as the borrower. It’s a way for lenders to manage their risk when someone borrows more than 80% of a property’s value. You pay the premium, but the lender is the one covered.
When Does LMI Apply?
LMI generally applies when your loan-to-value ratio (LVR) exceeds 80%. Your LVR is the amount you borrow compared to the value of the property.
For example, if you're purchasing a $700,000 property with a $70,000 deposit (10%), your loan amount is $630,000 and your LVR is 90%. Because that's above 80%, your lender will require LMI.
How Much Does LMI Cost?
LMI premiums vary depending on your LVR and the size of your loan. The lower your deposit and the larger your loan, the higher the premium.
To give you a rough idea:
On a $500,000 loan at 90% LVR, LMI can cost around $8,000 to $12,000
On a $700,000 loan at 95% LVR, the cost can exceed $20,000
LMI is usually added to your loan, which means you also pay interest on it over the life of the loan. The actual total cost ends up being higher than the upfront premium.
You can also learn more about how much deposit you actually need in our guide:
How Much Deposit Do You Really Need to Buy a Home in Australia?
How Can You Avoid LMI?
There are a few ways to get around paying LMI:
Save a 20% deposit. Once your deposit reaches 20% of the purchase price, LMI is no longer required.
Use a guarantor. A parent or close family member can use the equity in their own property to guarantee part of your loan, allowing you to borrow without LMI even with a smaller deposit.
Access a government scheme. The First Home Guarantee allows eligible first home buyers to purchase with as little as 5% deposit without paying LMI. The government guarantees the remaining portion of the deposit with the lender.
Use a professional discount. Some lenders offer LMI waivers for certain professionals, including medical practitioners, lawyers, and accountants, if they meet specific criteria.
Is LMI Ever Worth Paying?
Sometimes, paying LMI makes sense. If property prices in your area are rising quickly, waiting to save a larger deposit could cost you more in the long run than the LMI itself. You might pay $10,000 in LMI now, but avoid buying into a market that rises $50,000 while you save more.
It's a trade-off worth calculating carefully. A mortgage broker can run the numbers for your specific situation.
You can also learn more about the grants and schemes available to first home buyers in our guide:
The Complete First Home Buyer Guide in Australia (Grants, Schemes and Deposit Options)
Is LMI a One-Off Cost?
Yes. LMI is paid once, usually at settlement or when you first draw down the loan. It is not an ongoing premium. If you later refinance to a different lender, you may need to pay LMI again depending on your LVR at that time.
Ready to Work Out If LMI Applies to You?
Every situation is different. Some buyers are surprised to find they can avoid LMI completely, while others find it's the right call to get into the market sooner.
If you want to know exactly what LMI might cost you, or whether you qualify for a waiver or government scheme, get in touch for a free chat.
