Lenders Mortgage Insurance protects the lender, not you, if you borrow more than 80% of a property's value.
If you're applying for a home loan with less than a 20% deposit, LMI can add thousands to your upfront costs or be capitalised into your loan amount. It's not always avoidable, but knowing how it's calculated and when it applies gives you options to reduce or defer the cost.
What Is Lenders Mortgage Insurance and When Do You Pay It?
Lenders Mortgage Insurance is a one-off premium charged when your loan to value ratio exceeds 80%. The premium is calculated based on your deposit size, loan amount, and the lender's risk assessment. You'll typically pay LMI if you're borrowing more than 80% of the property's purchase price or valuation, whichever is lower.
The cost varies significantly between lenders. A borrower with a 10% deposit on a property at the current median in a growth suburb might face an LMI premium of $15,000 with one lender and $12,000 with another. The difference comes down to the insurer the lender uses and the risk category they assign to your application. This is one reason why comparing home loan options across multiple lenders can save you money before you even settle.
How LMI Is Calculated and Why It Increases Sharply Below 90% LVR
The premium increases as your deposit decreases. A borrower with a 15% deposit will pay substantially less than someone with a 10% deposit, even if the loan amount is identical. The jump in cost is particularly sharp once you drop below 90% LVR.
Consider a scenario where someone is purchasing at the suburb median with a 12% deposit. Their LMI premium might sit around $8,000. If they reduce their deposit to 8%, the premium could climb to $18,000 or more. That difference reflects the insurer's assessment of risk, which increases exponentially as the deposit shrinks. If you're close to a threshold like 90% or 85% LVR, even a small increase in your deposit can make a material difference to the premium.
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Strategies to Avoid LMI Without a 20% Deposit
Some lenders offer LMI waivers for specific professions including medical practitioners, accountants, and legal professionals. These waivers typically apply up to 90% LVR, and in some cases up to 95%, depending on the lender and your income level. The waiver is not automatic and you'll need to provide evidence of your professional registration and employment.
Another option is using a family guarantee, where a parent or close relative uses the equity in their property to cover part of your deposit. This reduces your loan to value ratio without requiring you to provide the full 20% deposit in cash. The guarantor's property is used as additional security, which means the lender's risk is lowered and LMI can be avoided. The guarantee can often be removed once you've built enough equity through repayments or property value growth, usually within a few years.
When Capitalising LMI Into Your Loan Makes Sense
Most lenders allow you to add the LMI premium to your loan amount rather than paying it upfront. This means you'll pay interest on the premium over the life of the loan, but it preserves your cash for other settlement costs or renovations.
If you're a first home buyer with limited savings beyond your deposit, capitalising LMI can help you move forward without depleting your emergency funds. The trade-off is that your total loan amount increases, which affects your ongoing repayments and the interest you'll pay over time. If you're planning to make extra repayments or refinance within a few years, the additional interest cost may be manageable. If you're planning to hold the loan at minimum repayments for a long period, paying the premium upfront can save you money in the long run.
How LMI Applies to Investment Loans and SMSF Purchases
Lenders Mortgage Insurance applies to investment loans in the same way it does to owner-occupied lending, but the premium is often slightly higher due to the increased risk profile. If you're borrowing above 80% LVR for an investment property, expect the LMI cost to reflect that.
For SMSF loans, LMI is less common because most lenders cap SMSF lending at 80% LVR. If you do find a lender willing to go higher, the LMI premium will be calculated based on the trust structure and the underlying asset. SMSF borrowers should factor this into their overall strategy, as the premium is paid by the fund and reduces the amount available for other investments.
Genuine Savings Requirements and How They Affect LMI Eligibility
Most lenders require genuine savings if you're borrowing above 90% LVR. Genuine savings are funds you've held in your own account for at least three months, and they typically need to make up at least 5% of the purchase price. Funds from a gift, bonus, or recent inheritance may not qualify unless they've been seasoned in your account.
If you don't meet the genuine savings requirement, some lenders will still approve the loan but charge a higher LMI premium or apply additional conditions. Others will decline the application outright. If you're in a scenario where your deposit includes a recent gift from family, it's worth discussing with a broker whether that lender will accept it or whether you should wait a few months to meet the savings threshold.
Refinancing and Whether You'll Pay LMI Again
If you refinance to a new lender and your loan to value ratio is still above 80%, you may be required to pay LMI again. This is because the new lender treats the application as a new loan and applies their own risk assessment. If you've built enough equity through repayments or property value growth to bring your LVR below 80%, you won't pay LMI on the refinance.
In our experience, borrowers who refinance within the first few years of purchasing often underestimate how much equity they've built. If you're considering a refinance to access a lower variable rate or better loan features, it's worth getting a valuation to confirm your current LVR before assuming LMI will apply.
If you're weighing up whether to move forward with a smaller deposit or wait until you've saved 20%, the decision comes down to timing and opportunity cost. Property values can move faster than savings in some markets, and waiting another year might mean the median price has increased beyond what your additional savings would cover. On the other hand, if you're buying in a stable or softening market, taking the time to avoid LMI could save you a significant amount without missing out on value growth.
Call one of our team or book an appointment at a time that works for you. We'll help you compare your options across lenders and show you what the LMI cost looks like based on your actual deposit and loan amount.
Frequently Asked Questions
What is Lenders Mortgage Insurance and when do I have to pay it?
Lenders Mortgage Insurance is a one-off premium charged when you borrow more than 80% of a property's value. It protects the lender if you default on the loan and is triggered when your deposit is less than 20% of the purchase price or valuation.
Can I avoid LMI without a 20% deposit?
Yes, some lenders offer LMI waivers for certain professions such as doctors, accountants, and legal professionals, typically up to 90% or 95% LVR. Alternatively, a family guarantee can reduce your loan to value ratio and help you avoid the premium without needing the full 20% deposit in cash.
Should I pay LMI upfront or add it to my loan amount?
Adding LMI to your loan amount preserves your cash for other settlement costs but means you'll pay interest on the premium over time. Paying it upfront reduces your total loan amount and long-term interest, but requires available funds at settlement.
Will I pay LMI again if I refinance?
You may pay LMI again if your loan to value ratio is still above 80% when you refinance to a new lender. If you've built enough equity through repayments or property growth to bring your LVR below 80%, LMI won't apply on the refinance.
How much does LMI cost?
The cost depends on your deposit size, loan amount, and the lender's insurer. A borrower with a 10% deposit might pay between $12,000 and $18,000 or more, depending on the lender and the property value. The premium increases sharply as your deposit decreases below 90% LVR.
