Understanding LMI: Lenders Mortgage Insurance Explained

Lenders Mortgage Insurance (LMI) is a term that comes up frequently when discussing home loans, especially for buyers with smaller deposits. Here's what you need to know.

What Is LMI?

LMI is a one-off insurance premium that protects the lender — not you — in case you default on your home loan. Despite being for the lender's benefit, the cost is passed on to the borrower.

When Do You Need to Pay LMI?

LMI is typically required when your Loan-to-Value Ratio (LVR) is above 80% — meaning your deposit is less than 20% of the property's value.

Examples

• $500,000 property with $100,000 deposit (80% LVR) — No LMI required
• $500,000 property with $50,000 deposit (90% LVR) — LMI applies, could be $8,000–$12,000
• $500,000 property with $25,000 deposit (95% LVR) — LMI applies, could be $15,000–$20,000

How Much Does LMI Cost?

LMI costs vary based on the loan amount, LVR, and the insurer. As a rough guide, expect to pay between 1% and 4% of the loan amount. The higher your LVR, the more expensive LMI becomes.

How Is LMI Paid?

LMI can be paid as a lump sum at settlement, or in many cases, it can be capitalised (added to your loan). If added to the loan, you'll pay interest on it over the life of the mortgage.

Ways to Avoid or Reduce LMI

1. Save a 20% Deposit

The most straightforward way to avoid LMI is to save a deposit of at least 20% of the property value.

2. Use a Guarantor

A family member can use equity in their property to guarantee part of your loan, effectively increasing your deposit to above 20% without needing the cash.

3. Government Schemes

The First Home Guarantee allows eligible buyers to purchase with as little as 5% deposit without paying LMI. Places are limited, so check eligibility with your broker.

4. Professional Packages

Some lenders offer LMI waivers for certain professions — doctors, lawyers, accountants, and other professionals may qualify for an LMI waiver with only a 10% deposit.

Tip: While LMI is an extra cost, it can actually help you get into the market sooner. In a rising market, waiting to save 20% might mean property prices increase by more than the LMI cost.

Is LMI Worth It?

It depends on your situation. A mortgage broker can help you weigh up the cost of LMI against the benefits of buying sooner, and explore alternatives like guarantor loans or government schemes.