Lenders Mortgage Insurance (LMI) Explained
Lenders Mortgage Insurance is one of the most misunderstood costs in Australian property finance. It can add thousands or tens of thousands of dollars to your home loan, yet many buyers do not fully understand what it is, why they are paying for it or how to avoid it. This guide gives you the complete picture so you can make an informed decision about whether to pay LMI or use an alternative strategy.
- LMI protects the lender, not the borrower, yet you pay for it
- It is required when your LVR exceeds 80% (deposit less than 20%)
- LMI can cost $2,000 to $40,000+ depending on loan amount and LVR
- It is usually capitalised into the loan, so you pay interest on it for the full term
- Strategies to avoid LMI include the First Home Guarantee, family guarantees and saving a 20% deposit
What Is LMI?
LMI is a one-off insurance premium that covers the lender if you default on your home loan and the sale of the property does not cover the outstanding loan balance. It is required by most lenders when you borrow more than 80% of the property's value — in other words, when your deposit is less than 20%.
In Australia, LMI is provided by two main insurers: Helia (formerly Genworth) and QBE Lenders' Mortgage Insurance. Some lenders self-insure, while a few use alternative providers. The cost is set by the insurer, not the lender, although the lender chooses which insurer to use.
It is crucial to understand that LMI does not protect you. If you default and the property sells for less than the debt, the LMI insurer pays the lender the shortfall — and then has the right to pursue you to recover that amount. You are still liable for the debt.
How Much Does LMI Cost?
LMI is calculated as a percentage of the loan amount, and the percentage increases significantly as LVR rises. Here is an indicative guide:
| LVR | $400,000 Loan | $600,000 Loan | $800,000 Loan |
|---|---|---|---|
| 80.01% - 85% | ~$3,200 | ~$6,500 | ~$10,800 |
| 85.01% - 90% | ~$7,600 | ~$13,500 | ~$21,000 |
| 90.01% - 95% | ~$14,000 | ~$25,000 | ~$38,000 |
These figures are indicative and vary by insurer, loan type (owner-occupied vs investment) and whether you are a first home buyer. The actual premium is determined at the time of application.
Most borrowers choose to capitalise LMI into the loan, which means it is added to your loan balance. While this avoids an upfront cash outlay, it means you pay interest on the LMI premium for the entire loan term. A $15,000 LMI premium capitalised into a 30-year loan at 6% p.a. will cost you an additional $17,400 in interest — bringing the true cost to $32,400.
How to Avoid LMI
- Save a 20% deposit: The most straightforward way. No LMI applies at 80% LVR or below.
- Use the First Home Guarantee: Eligible first home buyers can purchase with a 5% deposit and no LMI. The government guarantees the difference up to 20%. Places are limited each year.
- Use a family guarantee: A parent or family member uses equity in their property to guarantee your deposit shortfall. The lender treats the loan as 80% LVR, eliminating LMI. The guarantee can typically be removed once your LVR reaches 80% through repayments or property growth.
- Professional packages: Some lenders offer LMI waivers for specific professions (doctors, lawyers, accountants, engineers) at up to 90% LVR, recognising their high income stability and growth trajectory.
- Pay a higher rate instead: A few lenders offer "no LMI" loans at higher LVRs but charge a higher interest rate to compensate. This can be cost-effective for smaller loan amounts or shorter terms.
- Choose a lender that self-insures: Some lenders (particularly credit unions and smaller banks) use risk-based pricing instead of LMI. They charge a higher rate at high LVRs but do not charge a separate LMI premium.
Should You Pay LMI or Wait to Save 20%?
This is one of the most debated questions in Australian property finance. The answer depends on your personal circumstances and the property market outlook.
Arguments for paying LMI and buying sooner:
- If property prices are rising faster than you can save, waiting could mean a more expensive property and a larger deposit requirement
- You stop paying rent and start building equity sooner
- Once you own the property, any capital growth benefits you — potentially more than offsetting the LMI cost
Arguments for waiting:
- LMI is a significant cost that does not benefit you — it is pure protection for the lender
- A larger deposit means a smaller loan, lower repayments and better rates
- If property prices stagnate or fall, you have more equity buffer and less risk of negative equity
There is no universally correct answer. A broker can model both scenarios with actual numbers for your situation to help you decide.
- LMI is a one-off premium, not an ongoing cost
- It can be paid upfront or capitalised (added to the loan)
- Stamp duty may apply to the LMI premium in some states
- LMI is not transferable — if you refinance to a new lender at a high LVR, you may need to pay LMI again
- Some LMI policies offer partial refunds if the loan is paid off within the first few years
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees, or other loan amounts might result in a different comparison rate. Comparison rates are based on a secured loan of $30,000 over 5 years for vehicle finance and $50,000 over 5 years for equipment finance, as required under the National Credit Code.