If you plan on borrowing more than 80% of your property value (which is very common), you’ll need to tuck some money aside for Lenders Mortgage Insurance (LMI). LMI is a one-off payment designed to protect the lender (a.k.a the bank) if you find you can’t meet your repayments and the home has to be sold with debt outstanding.
One thing to keep in mind is that it doesn’t protect the borrower. In most cases, LMI is a cost passed on to you when your deposit is less than 20% of a property’s value.
In simpler terms, LMI is a game-changer that can help you get into a home sooner. A lender may be prepared to approve a loan with a smaller deposit if LMI is in place because it reduces their risk.
This can make a massive difference if you’re close to saving the full 20% but aren’t quite there yet.
When do you have to pay LMI?
LMI is usually required when your deposit is under 20% of the property’s value. Lenders use this threshold because it means you’re borrowing more than 80% of what the property is worth. Traditionally, LMI is paid at settlement, but depending on the lender, the premium might be paid up front or added to the loan to be spread out over time.
How much does LMI cost?
The total price tag for LMI isn’t fixed. It’s determined by the specific variables of your purchase, including the loan size and the property value. Because the bank is taking on more exposure with a smaller deposit, the premium naturally rises to match that level of risk. To put the different levels into perspective:
- Lower LVR (close to 80%): This usually involves a relatively minor premium added to your total costs.
- Mid-range LVRs (around 85-90%): You’ll generally see a moderate increase as the loan amount climbs.
- Higher LVRs (95% and above): These carry the highest premiums because the lender is at their maximum risk level.
While this is a one-off expense, you’ve got two ways to settle the bill. You can pay the premium as an upfront cost at settlement, or you can capitalise it by adding it to your total home loan. Choosing the latter keeps your initial cash requirements lower, but keep in mind that you’ll be paying interest on that premium over the full term of the mortgage.
How is LMI calculated?
The cost of LMI depends on the size of your loan and your loan-to-value ratio. The amount you need to pay generally increases as the deposit gets smaller. For example, you’ll pay more if you’re borrowing 95% of the purchase as opposed to 90%, as the lender is taking on more risk.
Does LMI protect the borrower?
No. LMI protects the lender, not the borrower. It’s an easy point to miss because the borrower usually pays the premium, but the insurance is strictly there to cover the bank’s loss if the loan isn’t repaid in full after a sale.
Can you avoid paying LMI?
Sometimes yes! The most common way to avoid LMI is to save the full 20% deposit. Some buyers might be able to use a guarantor arrangement (read, the Bank of Mum and Dad), where a parent or family member helps support the loan.
There are also plenty of other options to explore, like government-backed low-deposit schemes that can reduce the deposit needed and help you avoid LMI altogether.
The right path depends on your lender and your circumstances, so it’s worth chatting with a broker to see whether a guarantor loan or a specific scheme is the better option.
Is LMI the same as mortgage protection insurance?
No. LMI protects the lender if the borrower defaults and the sale of the property doesn’t cover the debt. Mortgage protection insurance is a different product entirely. It’s designed around the borrower’s repayments rather than the lender’s risk, so it’s important not to confuse the two.
How is LMI paid?
LMI is usually a one-off premium. Depending on the lender, it might be paid as part of the upfront purchase costs or added to the home loan so it’s paid off over the life of the loan. Some lenders also note that the premium is non-refundable, so it’s worth checking the loan documents carefully before proceeding.
What should buyers think about before paying LMI?
LMI is only one part of the overall cost of buying a home. You need to factor in your deposit, stamp duty, legal fees and moving costs. It’s worth comparing whether a smaller deposit with LMI is better than waiting longer to save more, especially if getting into the market now lets you make your mark sooner.
LMI, summarised
Choosing to pay LMI is basically a strategic decision about your timeline. It’s the price of admission for getting your build started now instead of spending several more years trying to outpace property prices while you save.
While it’s still an added expense, the real value is in the time you save and the ability to move into your own space much sooner than a traditional 20% deposit would allow.
The best way to move forward? Look at your specific numbers and decide which path actually fits your long-term goals.