Imagine finding your dream home, only to discover you need thousands of dollars more for your deposit. You could wait years to save the difference. Alternatively, Lenders Mortgage Insurance (LMI) could help you buy sooner.
However, there is a catch. You pay for the insurance, but it protects your lender, not you.
So, is LMI worth paying? How much does it cost, and can you avoid it?
Understanding how Lenders Mortgage Insurance works can help you make informed decisions when buying property. This guide explains everything Australian home buyers need to know, from LMI costs and eligibility to ways of avoiding the premium.
What Is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is an insurance policy that protects a lender if a borrower cannot repay their home loan. It covers certain financial losses when a property sale fails to recover the outstanding debt.
Lenders typically require LMI when borrowers have a deposit below 20% of the property’s accepted value. This usually applies when your loan-to-value ratio (LVR) exceeds 80%.
Although the lender receives the insurance protection, the borrower generally pays the premium. Depending on the lender, you can pay this amount upfront or add it to your home loan.
For example, imagine buying a property valued at $600,000 with a $60,000 deposit. You would need to borrow $540,000, giving you a 90% LVR.
Your lender may require LMI because you’re borrowing more than 80% of the property’s value. The premium depends on several factors, including your loan amount, deposit and lender.
Key things to understand about LMI
- Who pays? The borrower usually pays the insurance premium.
- Who benefits? The lender receives protection against certain losses.
- When is it required? Usually when your LVR exceeds 80%, subject to lender policies.
- When do you pay? Generally at settlement or by adding the premium to your loan.
- Is it refundable? Some policies allow partial refunds under specific conditions.
- Can you avoid it? Yes, depending on your deposit, eligibility and available lending options.
According to Moneysmart, LMI does not protect borrowers or guarantors against an inability to repay their home loans.
LMI Calculator Australia
LMI Calculator
Estimate your Lenders Mortgage Insurance and see how your payment choice affects your loan.
You pay LMI out of pocket. It requires more cash now, but your loan stays smaller.
Loan Summary
Based on a 30-year principal & interest loan.
Deposit + Upfront LMI Payment.
How Does Lenders Mortgage Insurance Work?
Lenders Mortgage Insurance reduces the lender’s financial risk when approving a home loan with a smaller deposit. It can also allow eligible borrowers to enter the property market sooner.
Here’s how the process generally works:
- You apply for a home loan – You find a property and apply for a mortgage with a deposit below 20%. Your lender assesses your income, expenses, debts, credit history and deposit.
- Your lender assesses your LVR – The lender compares your proposed loan amount with the property’s accepted value. If your LVR exceeds its threshold, it may require LMI.
- The lender calculates your LMI premium – The lender or insurer calculates the premium using factors such as your deposit, loan amount, property type and loan purpose.
- You pay the premium – You generally pay the premium at settlement or capitalise it into your home loan, if your lender allows this.
- The insurer protects the lender – If you default and the lender suffers a covered loss after enforcing its security, the insurer may pay a claim under the policy.
However, LMI does not eliminate your responsibility to repay the loan. If the insurer pays the lender, it may have the right to recover the outstanding amount from you.
This means LMI can reduce the lender’s risk without removing the financial obligations attached to your mortgage.
Why Do Lenders Require Mortgage Insurance?
Lenders want to reduce the risk of losing money when borrowers cannot meet their mortgage repayments.
A smaller deposit generally means a larger loan compared with the property’s value. Consequently, the lender has less equity available to absorb potential losses if the borrower defaults.
Consider a property purchased for $600,000. A buyer with a $120,000 deposit borrows $480,000, while another buyer with a $30,000 deposit borrows $570,000.
Comparing two deposit sizes
| 20% deposit | 5% deposit | |
| Property value | $600,000 | $600,000 |
| Deposit | $120,000 | $30,000 |
| Loan amount | $480,000 | $570,000 |
| LVR | 80% | 95% |
| LMI | Usually not required | Usually required |
The second buyer has a higher LVR and less equity in the property. If property prices fall and the borrower defaults, the lender may face a larger shortfall after selling the property.
LMI helps protect lenders against certain losses associated with this risk. APRA recognises LMI as one of the risk management measures lenders can use for residential mortgage lending.
However, LMI is not a substitute for responsible lending. Lenders must still assess whether borrowers can afford their repayments.
When Do You Need to Pay Lenders Mortgage Insurance?
You may need to pay LMI when your deposit is less than 20% of the property’s accepted value. However, the exact requirements depend on your lender and loan circumstances.
Your loan-to-value ratio (LVR) helps determine whether LMI applies.
Understanding your loan-to-value ratio (LVR)
Your LVR is the percentage of a property’s value that you borrow from a lender.
You can calculate it using this formula:
LVR=Loan amountProperty value×100\text{LVR} = \frac{\text{Loan amount}}{\text{Property value}} \times 100LVR=Property valueLoan amount×100
For example, suppose you’re purchasing a property worth $800,000 with a $100,000 deposit.
Your loan amount would be $700,000, resulting in an LVR of 87.5%.
This means you’re borrowing 87.5% of the property’s value and contributing the remaining 12.5%.
How different deposit sizes affect your LVR
| Deposit | Loan amount on an $800,000 property | LVR | Typical LMI requirement |
| 5% ($40,000) | $760,000 | 95% | Usually required |
| 10% ($80,000) | $720,000 | 90% | Usually required |
| 15% ($120,000) | $680,000 | 85% | Usually required |
| 20% ($160,000) | $640,000 | 80% | Usually avoided |
| 25% ($200,000) | $600,000 | 75% | Usually avoided |
These examples exclude purchase costs and assume the lender accepts the stated property value. Lender policies and exemptions may differ.
Generally, borrowers with an LVR above 80% may need to pay LMI. However, some lenders offer LMI waivers or alternative low-deposit arrangements to eligible borrowers.
Can you pay LMI with a deposit below 20%?
Yes. Some lenders allow eligible borrowers to purchase property with a deposit as low as 5%, provided they meet the lender’s requirements.
However, a smaller deposit generally means a higher LVR and potentially a larger LMI premium.
You must also demonstrate that you can afford the repayments. A sufficient deposit alone does not guarantee home loan approval.
How Much Does Lenders Mortgage Insurance Cost?
The cost of Lenders Mortgage Insurance varies between lenders and insurers. There is no single premium that applies to every Australian home buyer.
Your LMI premium generally depends on several factors, including:
- Loan amount: Larger loans can attract higher premiums.
- Deposit size: Smaller deposits generally increase your LMI premium.
- LVR: Higher LVRs usually result in higher premiums.
- Property value: The accepted property value influences your LVR and premium.
- Property type: Some lenders charge different premiums for apartments, houses and other property types.
- Loan purpose: Owner-occupied and investment loans may attract different premiums.
- Lender and insurer: Different providers use different premium structures and eligibility rules.
Why can a small deposit difference change your LMI premium?
LMI premiums often use pricing bands based on LVR. These bands can create significant differences in premiums when your borrowing level crosses a threshold.
For example, a borrower with an 89% LVR may receive a different premium from someone with a 91% LVR.
Even a small increase in your deposit could move you into a lower LVR band. Consequently, your LMI premium may decrease.
However, you should consider the cash required for other expenses before increasing your deposit.
You may need money for stamp duty, conveyancing, inspections, moving expenses and unexpected repairs.
How Is Lenders Mortgage Insurance Calculated?
Lenders and insurers generally use premium tables or pricing models to calculate LMI. These consider your loan amount, LVR and other relevant lending details.
The calculation is not always a simple percentage of your loan. Instead, insurers may apply different premium rates across several LVR and loan-size bands.
For example, imagine you’re purchasing a property valued at $700,000 with a $70,000 deposit.
Your loan amount would be $630,000, giving you a 90% LVR.
Your lender would use its applicable LMI pricing structure to calculate the premium. The final amount may also depend on the property and loan conditions.
Some lenders also include capitalised LMI when determining the final LVR or applicable interest rate band.
This can increase your borrowing costs beyond the initial insurance premium.
Does LMI affect your interest rate?
LMI does not automatically increase your interest rate. However, some lenders set interest rates according to your LVR.
If you add LMI to your loan, your total borrowing amount increases. This may push your loan into a higher LVR pricing band.
As a result, you could face both a larger loan balance and a higher interest rate.
For this reason, compare the LMI premium, interest rate and total repayments together. A lower upfront insurance cost does not always mean a cheaper home loan.
Can You Add LMI to Your Home Loan?
Yes. Some lenders allow you to capitalise LMI, which means adding the insurance premium to your home loan instead of paying it upfront.
This option can reduce the amount of cash you need at settlement. However, it also increases your total loan balance.
Example of capitalising LMI
Imagine you’re purchasing a property with a $500,000 home loan and your lender quotes an illustrative LMI premium of $15,000.
You have two options:
| Pay LMI upfront | Capitalise LMI | |
| Home loan | $500,000 | $500,000 |
| LMI premium | $15,000 | $15,000 |
| Additional amount borrowed | $0 | $15,000 |
| Total loan | $500,000 | $515,000 |
| Cash required for LMI | $15,000 | $0 |
Illustrative example only. It excludes interest, fees and any lender-specific restrictions.
If you pay LMI upfront, you avoid paying interest on the premium. However, you need sufficient savings to cover the additional expense.
If you capitalise LMI, you preserve more cash for settlement and emergencies. However, you pay interest on the additional amount for as long as it remains outstanding.
Your lender may also restrict how much LMI you can add to your loan. The additional borrowing could affect your LVR and interest rate.
Therefore, consider your available savings, repayments and total loan costs before choosing either option.
Who Provides Lenders Mortgage Insurance in Australia?
Several insurers and financial institutions provide or arrange Lenders Mortgage Insurance for Australian home loans.
The lender generally chooses the insurer and arranges the policy as part of its lending process.
Two established providers in the Australian LMI market include:
- Helia: Provides lenders mortgage insurance and related risk management solutions for residential mortgage lending.
- QBE Lenders’ Mortgage Insurance: Provides mortgage insurance solutions that protect lenders against certain losses arising from borrower defaults.
Some lenders also use their own insurance arrangements or offer alternative low-deposit fees.
Borrowers generally cannot choose the insurer directly. However, they can compare home loans from different lenders to understand their premiums, fees and lending requirements.
What Happens If You Default on Your Home Loan?
LMI does not prevent mortgage default or remove your obligation to repay your home loan. It provides protection to the lender if certain losses occur.
If you cannot meet your mortgage repayments, your lender will generally contact you to discuss your financial circumstances and available options.
Depending on your situation, you may be able to arrange a repayment plan, request financial hardship assistance or explore other solutions.
However, if you cannot resolve the default, the lender may eventually enforce its mortgage security and sell the property.
How does an LMI claim work?
Consider a borrower who owes $500,000 on their mortgage but can no longer afford repayments.
The lender takes possession of the property through the applicable legal process and sells it. Suppose the sale generates $430,000 after relevant selling costs.
The lender may face a shortfall of $70,000, excluding any other recoverable amounts.
If the policy covers the loss, the insurer may pay an eligible claim to the lender.
However, the insurer may then seek to recover the amount paid from the borrower, subject to the policy and applicable law.
Important: LMI is not debt forgiveness. Even if the insurer pays a claim, you may remain responsible for the outstanding shortfall.
This is why borrowers should understand their repayment obligations before taking out a home loan.
What Is the Difference Between LMI and Mortgage Protection Insurance?
Although their names sound similar, Lenders Mortgage Insurance and mortgage protection insurance serve different purposes.
LMI protects the lender against certain financial losses if a borrower defaults. Mortgage protection insurance, where available, may help cover a borrower’s repayments under specified circumstances.
| Feature | Lenders Mortgage Insurance | Mortgage Protection Insurance |
| Main purpose | Protects the lender against covered losses | May help the borrower meet repayments |
| Who benefits? | The lender | The insured borrower, subject to policy terms |
| Who usually pays? | The borrower | The borrower |
| Common trigger | A covered loss following borrower default | An insured event, such as involuntary unemployment, depending on the policy |
| Is it compulsory? | May be required by the lender | Generally optional |
| Does it clear the entire mortgage? | No | Usually not |
Mortgage protection insurance policies differ between providers. Some cover specific repayment obligations following illness, injury or involuntary unemployment, subject to exclusions and conditions.
Meanwhile, LMI does not cover your repayments if you lose your income. It also does not provide a direct financial benefit to you when you experience hardship.
Understanding this distinction is important when comparing insurance products associated with a home loan.
How Can You Avoid Lenders Mortgage Insurance?
Paying LMI is not the only way to purchase a property with a smaller deposit. Depending on your circumstances, several options may help you avoid the premium.
1. Save a 20% deposit
Saving a deposit of at least 20% is one of the most common ways to avoid LMI.
When you borrow 80% or less of the lender’s accepted property value, you will generally avoid LMI on a standard residential home loan.
For example, purchasing a $600,000 property with a $120,000 deposit gives you an 80% LVR.
However, remember to budget for stamp duty, conveyancing, inspections and other purchase costs. You should also retain enough savings for unexpected expenses.
2. Use a government-backed home guarantee scheme
Eligible Australian buyers may be able to purchase a property with a smaller deposit without paying LMI through a government-backed guarantee scheme.
The Australian Government 5% Deposit Scheme allows eligible buyers to purchase a home with a deposit as low as 5%. Eligible single parents and legal guardians may qualify with a 2% deposit.
Under the scheme, the government guarantees part of the lender’s exposure. This can remove the need for LMI for eligible participants.
However, applicants must satisfy the scheme’s eligibility requirements, including applicable property price limits and owner-occupier conditions. They must also receive approval from a participating lender.
Government guarantees do not remove your obligation to repay the mortgage.
3. Apply for an LMI waiver
Some lenders offer LMI waivers to eligible borrowers in selected professions.
These arrangements may allow certain professionals to borrow a higher percentage of a property’s value without paying traditional LMI.
Depending on the lender, eligible professions may include:
- Doctors and medical practitioners
- Nurses and midwives
- Dentists
- Accountants
- Lawyers
- Other selected professionals
However, eligibility requirements vary between lenders. Some may require professional registration, minimum income levels, specific employment arrangements or limits on the loan amount.
Being employed in an eligible profession does not automatically guarantee an LMI waiver. Your lender must still assess your application and confirm that you meet its requirements.
4. Use a family guarantor
A family guarantor home loan may allow eligible borrowers to purchase a property with a smaller deposit while avoiding LMI.
Under this arrangement, an eligible family member uses some of the equity in their property as additional security for your mortgage.
For example, your parents may agree to guarantee part of your home loan using their property.
This additional security can reduce the lender’s risk and may allow you to borrow more without paying LMI.
However, a guarantor takes on a significant financial responsibility. If you cannot repay your mortgage, the lender may seek payment under the guarantee and could take action against the secured property.
The guarantee should have clearly defined limits and release conditions. Guarantors should obtain independent legal and financial advice before proceeding.
5. Compare lenders with alternative low-deposit arrangements
Some lenders offer alternative arrangements for borrowers who have smaller deposits.
These may include low-deposit fees, lender-specific insurance arrangements or special loan products.
Although these options may avoid traditional LMI, they can involve other costs or restrictions.
For example, a lender may charge a low-deposit fee or apply a different interest rate to borrowers with higher LVRs.
Therefore, compare the total cost of borrowing, including upfront fees, interest, ongoing charges and repayment conditions.
6. Increase your deposit with a genuine savings plan
Another way to reduce or avoid LMI is to increase your deposit before applying for a home loan.
You could achieve this by regularly saving a portion of your income, reducing unnecessary expenses or using eligible financial gifts.
Some lenders require evidence of genuine savings, particularly when applicants have smaller deposits.
Requirements vary between lenders, so check which funds they accept and whether they impose minimum savings periods.
A larger deposit can reduce your LVR, lower your borrowing requirements and potentially eliminate LMI.
However, consider how long it will take to reach your savings target and whether you can retain an adequate emergency fund.
Can You Get an LMI Refund?
In certain circumstances, you may be eligible for a partial LMI refund if you repay your home loan early.
However, refunds depend on the insurer’s policy, your lender’s arrangements and the circumstances surrounding your loan.
Some insurers offer partial refunds when borrowers repay their loans within a specified period. The amount may decrease as more time passes after settlement.
For example, certain policies may provide a partial refund when a borrower pays off their mortgage and releases the security property within the first two years.
However, other policies may exclude refunds when borrowers have defaulted or failed to meet specific conditions.
You should never assume that you will receive an LMI refund simply because you sell your property or repay your mortgage early.
Check your specific policy and obtain confirmation from your lender before including a potential refund in your financial plans.
Do You Have to Pay LMI Again When Refinancing?
You may need to pay LMI again when refinancing your home loan, particularly if your equity remains below 20%.
When you refinance, your new lender assesses your application using its own lending policies and property valuation.
Even if you have already paid LMI on your original mortgage, the insurance policy generally does not transfer automatically to another lender.
For example, imagine you originally purchased a property for $600,000 with a 10% deposit. You paid LMI as part of your original home loan.
Several years later, you decide to refinance. However, the property has not increased in value as expected, and your remaining mortgage is still relatively high compared with its current value.
Your new lender may require LMI if your LVR exceeds its threshold.
You may avoid another premium if you have built sufficient equity, qualify for an exemption or meet the new lender’s alternative lending requirements.
Before refinancing, compare any new LMI premium with potential interest savings, discharge fees, establishment costs and other expenses.
You should also consider whether extending your loan term could increase the total interest payable.
Is Paying LMI Worth It?
Whether paying Lenders Mortgage Insurance makes financial sense depends on your circumstances, savings, borrowing capacity and property plans.
For some buyers, paying LMI may allow them to purchase a suitable property without waiting to save a larger deposit.
For others, waiting until they have a 20% deposit could reduce borrowing costs and avoid the insurance premium.
Neither option is automatically cheaper. The right comparison involves considering the full financial impact of buying sooner or continuing to save.
| Option | Potential benefits | Potential drawbacks |
| Buy sooner and pay LMI | Enter the property market with a smaller deposit | Higher upfront costs or a larger mortgage |
| Save a 20% deposit | Usually avoid LMI and borrow less | Takes longer to save and may involve additional rent |
| Use a government guarantee | May avoid LMI with a smaller deposit | Eligibility and property restrictions apply |
| Use a family guarantor | May reduce or eliminate LMI | Creates financial risks for the guarantor |
| Qualify for an LMI waiver | May avoid the premium while borrowing more | Limited eligibility and lender choice |
Consider the cost of waiting
Waiting to save a larger deposit can reduce the amount you need to borrow. However, it may also mean paying rent for longer and delaying your property purchase.
Property prices and other costs may also change while you save. However, future property price movements are uncertain.
Therefore, avoid basing your decision entirely on expectations about property prices.
Instead, compare realistic savings targets, likely repayments, potential LMI costs and the amount of money you would retain after settlement.
Consider your financial buffer
Buying a property with a smaller deposit can leave you with less equity and potentially higher mortgage repayments.
You should also consider the costs of moving, repairs, insurance, utilities and ongoing property maintenance.
Even if you can afford the deposit and LMI, you need enough money to manage unexpected expenses.
A mortgage that leaves no room in your budget can create financial pressure if your circumstances change.
Conclusion
Lenders Mortgage Insurance can help Australian home buyers purchase property with a smaller deposit. However, it adds another cost to an already significant financial commitment.
Although LMI protects the lender, borrowers generally pay the premium. They also remain responsible for their mortgage repayments and any outstanding debt following a default.
Fortunately, buyers may have several ways to reduce or avoid LMI. These include saving a larger deposit, qualifying for a government-backed guarantee, obtaining an LMI waiver or using a family guarantor.
The key is to understand the full cost of each option before committing to a home loan. Consider your deposit, repayments, financial buffer and long-term borrowing costs.
Ultimately, understanding how LMI works can help you assess your options, manage your home-buying expenses and make a more informed property decision.
