When you’re buying a home in Australia, especially with a smaller deposit, you may come across something called Lenders Mortgage Insurance, or LMI. For many buyers, it’s an unexpected cost that raises questions: What is LMI? Why do I have to pay it? And most importantly, can I avoid it?
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is a one-off insurance premium that protects the lender, if the borrower defaults on the loan. It’s typically required when your deposit is less than 20% of the property’s value (meaning your Loan to Value Ratio, or LVR, is over 80%).
While it doesn’t offer any direct protection to you, it allows lenders to offer home loans with lower deposit requirements, making it easier for more people to enter the property market.
When Do You Have to Pay LMI?
LMI is usually required when your LVR exceeds 80%, in other words, when you have less than a 20% deposit.
For example:
If you’re buying a $700,000 home and have a $70,000 deposit (10%), your LVR is 90%, and LMI will likely apply.
On the other hand, if you’re buying a $700,000 home and have a $140,000 deposit (20%), your LVR is exactly 80%, and you typically won’t be required to pay LMI.
Different lenders have slightly different rules, but the general trigger point for LMI is that 80% threshold.
How Much Does LMI Cost in Australia?
LMI isn’t a flat fee, it’s calculated based on your loan amount, deposit size, and lender’s policy. It can range from a few thousand dollars to over $20,000.
Here’s a general guide for a $600,000 property:
- 5% deposit ($30,000) → Loan of $570,000
➤ Estimated LMI: $17,000–$20,000 - 10% deposit ($60,000) → Loan of $540,000
➤ Estimated LMI: $9,000–$12,000 - 15% deposit ($90,000) → Loan of $510,000
➤ Estimated LMI: $4,000–$6,000
You can usually choose to pay it upfront or add it to your loan (called “capitalising” the LMI). If it’s added to your loan, you’ll pay interest on it over the life of your mortgage.
LMI costs vary between lenders and loan products. These figures are a general guide, always check with your lender or broker for a personalised estimate based on your circumstances.
Who Pays for LMI?
In short, you do.
Lenders arrange the insurance, but the cost is passed directly to you as the borrower. It’s not a shared cost, and it doesn’t protect you in case you can’t make repayments.
How Can You Avoid Paying LMI?
While Lenders Mortgage Insurance can be a significant upfront cost, the good news is that there are several ways borrowers can reduce, or completely avoid, paying it, depending on their financial situation, profession, or available support.
1. Save a 20% Deposit
The simplest way to avoid LMI is to bring your deposit up to 20%. It may take longer, but it can save you thousands in insurance premiums.
2. Use a Guarantor
Some lenders offer guarantor loans, where a close family member (usually a parent) offers part of their property as security. This can help you secure a loan without needing a full deposit, and avoid LMI altogether.
3. Access Government Schemes
Government programs are sometimes available to help eligible home buyers purchase with a smaller deposit, without triggering LMI. These schemes typically involve a government body guaranteeing part of your loan, allowing you to borrow with as little as 5% (or even 2% in some cases) and still avoid LMI.
4. Check for Professional Waivers
Some lenders waive LMI for borrowers in certain professions, like doctors, lawyers, accountants, or engineers, even with a 10% or 15% deposit. It’s worth asking your broker if this applies to you.
5. Shop Around for Lender Deals
Occasionally, lenders offer promotions that reduce or waive LMI on certain loans or for specific buyer types. A mortgage broker can help you compare options.
Is Paying LMI Always a Bad Thing?
While most buyers aim to avoid Lenders Mortgage Insurance if possible, paying LMI isn’t always a negative, it can actually be a strategic move in certain situations.
Pros of Paying LMI:
- You can buy sooner with a smaller deposit.
- You may benefit from rising property prices while you’re in the market, rather than waiting.
Cons of Paying LMI:
- It’s an additional upfront cost, sometimes significant.
- It adds to your overall loan if capitalised, so you’ll pay interest on it over time.
- It doesn’t protect you as the borrower.
LMI FAQs
Q: Is LMI refundable if I refinance or repay early?
A: Usually not. LMI is a one-off, non-refundable fee.
Q: Can LMI be negotiated or waived?
A: Sometimes, especially for certain professions or with a guarantor.
Q: Can I avoid LMI if I’m buying with a partner?
A: Possibly, if your combined deposit reaches 20% of the purchase price.
Q: Does LMI apply to investment properties?
A: Yes. The same LVR rules apply for investment loans.
The Bottom Line
Lenders Mortgage Insurance is a cost that many Australian home buyers face, but with the right advice, it doesn’t have to be a barrier. Whether it’s saving a bigger deposit, accessing a government scheme, or getting help from family, there are multiple ways to reduce or avoid LMI altogether.
Ready to Buy Property?
Understanding LMI is just one part of the home loan journey. Whether you’re a first-home buyer or upgrading, it’s important to know your deposit options and borrowing power before making any decisions.
The team at Loan Gallery are experienced home loan specialists who can help you navigate your options, clarify your finances, and find the best loan solution tailored to your goals.
With clear guidance and personalised support, Loan Gallery can help you move forward with confidence, and avoid costly surprises along the way.
Contact a Loan Gallery expert today to get started.
