What Is Lenders Mortgage Insurance and When Might You Pay It?
Everything you need to know about LMI, when it applies, and how you might be able to avoid paying it.
Lenders Mortgage Insurance (LMI) is a one-off insurance premium you pay if your deposit is less than 20% of the property's purchase price. It protects the lender—not you—in case you are unable to meet your loan repayments and the property is sold for less than the outstanding loan balance.
How LMI works
When you borrow more than 80% of a property’s value (a Loan-to-Value Ratio, or LVR, above 80%), the lender considers the loan higher risk. To mitigate this risk, they require LMI. The premium is usually calculated as a percentage of the loan amount and can often be added (capitalised) to your total loan balance, meaning you pay it off gradually with your regular repayments rather than upfront.
Illustrative example
Illustrative example: You are buying a $600,000 property with a $60,000 deposit (10%). Your loan amount is $540,000 (90% LVR). The lender requires LMI, which might cost approximately $12,000. You can choose to pay this upfront or add it to your loan, making your new loan balance $552,000.
What may change the outcome
The cost of LMI varies significantly between different lenders and LMI providers. It increases as your LVR increases and as your loan amount increases. Some lenders offer LMI waivers for certain high-income professions (like doctors or accountants) or for eligible participants in government guarantee schemes.
Common misunderstandings
A frequent misunderstanding is that LMI protects the borrower if they lose their job or get sick. It does not. LMI solely protects the lender from financial loss. Borrowers seeking personal protection usually need separate income protection or life insurance.
When a personal review may help
Deciding whether to pay LMI to buy now, or wait to save a 20% deposit, is a complex decision. A broker can help you compare the cost of LMI against the potential risks of property prices rising while you continue to save.
Next step
Explore our Home Buying Costs Calculator to see how a smaller deposit might affect your upfront costs, or read our First Home Buyers guide.
This article provides general information only and does not take into account your objectives, financial situation or needs. It does not constitute personal credit, financial, tax or legal advice. Lending outcomes depend on individual circumstances, lender policy and assessment.
Have questions about your situation?
Every home loan scenario is unique. Speak directly with Cameron or Matthew to get clear answers.