What is lenders mortgage insurance (LMI) and How can you avoid It in Australia?

Lenders mortgage insurance (LMI) is an insurance policy you may need to pay if the lender considers you a high-risk borrower, such as when you borrow more than 80% of the property’s value.

LMI is designed to protect the lender from financial loss if the borrower can no longer repay the loan. The policy covers the gap between what is left on the mortgage after the property is repossessed and sold.

Remember, LMI doesn’t protect you, the borrower, from loan default. You can consider mortgage protection insurance if you’re looking to insure yourself against the debt.

LMI protects the lender, not you. By reducing the bank’s risk when issuing a high loan-to-value ratio (LVR) loan, LMI can make it easier for borrowers with smaller deposits to secure approval, or borrow larger amounts.

If your loan requires LMI, you can either pay the premium upfront at settlement, or add it to your total loan amount. But keep in mind that capitalising LMI (rolling it into your loan) can increase your monthly repayments, and you’ll pay interest on the premium over the life of the loan.

LMI is tied to your original lender and is generally non-transferable and non-refundable. If you refinance with a new lender while your LVR is still above 80%, you may have to pay for LMI again.

LMI may be required when you borrow a large percentage of the property's value. While the exact threshold depends on the lender, LMI is commonly required when your LVR is above 80%. For example, you may need to pay for LMI in these situations:

• Buying a home with a deposit of less than 20%. A smaller deposit generally means a higher LVR and may trigger LMI.
• Buying an investment property with a small deposit. LMI can also apply to investment loans where the LVR is above the lender's threshold.
• Refinancing with limited equity. If your property has not built up enough equity to bring your new loan below the lender's LMI threshold, you may need to pay LMI again.
• Borrowing more against your property. Increasing your loan through an equity release or top-up can push your LVR higher and the lender may ask you to pay LMI charges.

Note that the exact rules vary between lenders and some lenders also offer LMI waivers to eligible borrowers, such as professionals like doctors and lawyers.

There is no fixed LMI fee. The amount you pay depends on factors such as your loan amount, deposit, LVR, loan purpose, property and lender.

LMI generally costs around 1% to 2% of the loan amount, although the actual premium can vary depending on your circumstances.

For example, if you borrow $600,000, an LMI premium of 1% would be $6,000, while 2% would be $12,000.

The amount can change significantly as your deposit changes. A smaller deposit means a higher LVR, which generally means a higher LMI premium.

You can use Helia's LMI fee estimator to get an indication of the premium for your particular situation. Helia notes that the estimate is only a guide and that the actual premium is calculated when you apply for LMI.

If you add the LMI to your home loan rather than paying it upfront, you're borrowing the cost of the insurance as well. You'll generally then pay interest on that amount over the life of the loan, increasing the overall cost.

A 20% deposit is the usual benchmark for avoiding LMI. That gives you an 80% loan-to-value ratio (LVR), meaning you borrow no more than 80% of the property's value.

With a smaller deposit, LMI will generally apply. The higher your LVR, the more LMI you may have to pay.

Keep in mind that these aren't set-in-stone rules. The exact criteria can vary depending on the lender and loan product.

Yes, some borrowers may be able to get a home loan without paying LMI even with a deposit of less than 20%.

Some lenders offer LMI waivers for eligible professionals, including certain doctors, lawyers and accountants. Eligibility varies between lenders and may depend on your profession, income, employment and the lender's other requirements.

The Australian Government 5% Deposit Scheme can also help eligible borrowers buy a home with a deposit of as little as 5% without paying LMI. Under the scheme, the government guarantees part of the loan to the lender, reducing the lender's risk. Eligible single parents and guardians may be able to buy with a 2% deposit.

You may also be able to use a family guarantor. A family member can use the equity in their property to guarantee part of your loan, which may allow you to borrow with a smaller deposit without paying LMI. The guarantor takes on responsibility for the guaranteed portion if you can't meet your repayments.

However, a smaller deposit means borrowing more relative to the property's value. Even when you don't pay LMI, it's important to consider the larger loan and the interest you'll pay over time.

Paying LMI isn't automatically a bad deal. The question is whether paying LMI to buy sooner could make more sense than waiting until you have a 20% deposit.

A bigger deposit can reduce how much you borrow and may help you avoid LMI. But saving for an extra 10% or 15% can also take years, while property prices may change during that time. In general, the longer you take to save your deposit, the longer you wait to buy.

For example, imagine you want to buy a $600,000 home and currently have a $60,000 deposit.

You have two broad options:

*The future property price could be higher or lower. This is simply an illustration.

Buying sooner means paying LMI and starting with a larger loan. But you could also start building equity sooner and stop waiting for your deposit to reach 20%.

Waiting avoids LMI, but you continue renting while you save and take on the risk that the property you want becomes more expensive.

The right comparison isn't simply LMI versus no LMI. It's the cost of LMI versus the potential cost of waiting. For example, Helia found that, based on its modelling, home buyers using LMI in 2024 were ahead after one year once the cost of LMI was taken into account. The result was a $31,000 difference for houses and $19,000 for units.

That doesn't mean buying with LMI will always leave you better off. Property prices can fall, your circumstances can change, and a larger loan means paying more interest.

It simply shows why avoiding LMI shouldn't be the only factor in the decision.

LMI adds to the cost of buying your home.

You also start with a higher LVR and less equity in the property. It means the loan will be larger than it would have been with a 20% deposit, which generally means paying more interest over time.

If you add the LMI to your loan rather than paying it upfront, you're borrowing that cost as well. And if property prices fall after you buy, having less initial equity can leave you with a smaller buffer.

To put it simply, LMI isn’t good or bad. It's a cost that needs to be weighed against what waiting for a larger deposit could cost you.

There are several ways you may be able to avoid LMI or reduce what you pay.

Having enough savings to cover a 20% deposit is the simplest way to avoid LMI.

The trade-off is time. Waiting to build a larger deposit could delay your purchase, so it is worth considering how the cost of LMI compares with the potential cost of waiting.

Some lenders offer to waive LMI for eligible borrowers, including professionals like doctors and lawyers. Check with the lender for a professional discount or speak to a broker to find out whether you might be eligible for an LMI waiver.

A family member may be able to use the equity in their property to guarantee part of your loan.

This can help you borrow with a smaller deposit and may allow you to avoid LMI. However, the guarantor takes on financial responsibility if you cannot meet your repayments, so it is an arrangement that needs to be considered carefully.

Under the Australian Government 5% Deposit Scheme, the government guarantees part of your loan to the lender. This reduces the lender's risk and can allow eligible buyers to purchase with a deposit as low as 5% without paying LMI.

You can also look at the First Home Owner Grant (FHOG) in your state or territory. If you're eligible, the grant can give you extra funds towards your home purchase, helping increase the money you have available for the deposit and other upfront costs.

The two work differently: the government guarantee helps you borrow with a smaller deposit, while the FHOG can boost your deposit size.

LMI premiums can vary between lenders and insurers, so the cost isn't necessarily the same for every loan.

If you're comparing lenders, look at the total cost of the loan, including the interest rate, fees and LMI, rather than assuming the lender with the lowest advertised rate will be the cheapest overall.

If you refinance your home loan, the LMI you paid on your original loan generally doesn't transfer to your new lender.

This means you could potentially have to pay LMI again if your new loan has a high LVR.

For example, if you bought your home with a 10% deposit and you still owe more than 80% of the property's current value when you refinance, the new lender may require LMI.

On the other hand, if you've built up enough equity through repayments, an increase in your property's value, or both, your LVR may have fallen to 80% or below. In that case, you would generally avoid LMI on the new loan.