Lenders Mortgage Insurance (LMI) is insurance that protects your lender — not you — in the event you default on your home loan and the property sale proceeds are insufficient to cover the outstanding debt. You pay the premium. The insurer pays the lender if there is a shortfall after a forced sale. If there is still a residual debt after the insurer pays the lender, the insurer can then pursue you for that amount. LMI provides you no direct protection whatsoever.
Most Australian lenders require LMI when a borrower has a deposit of less than 20% of the property purchase price — that is, a Loan to Value Ratio (LVR) above 80%. The trigger threshold varies slightly by lender; some require LMI above 85% LVR, and a few specialist lenders operate with different thresholds. The standard rule for the major banks and most lenders is 80% LVR. Below 80%, no LMI is required.
LMI is a one-off premium, typically capitalised (added to the loan balance) rather than paid upfront in cash. Adding LMI to the loan means you pay interest on it over the life of the loan, increasing its total cost further.
| Purchase price | Deposit (10%, 90% LVR) | Approximate LMI cost |
|---|---|---|
| $500,000 | $50,000 | $8,000–$12,000 |
| $700,000 | $70,000 | $14,000–$20,000 |
| $900,000 | $90,000 | $18,000–$27,000 |
| $1,200,000 | $120,000 | $24,000–$36,000 |
At 85% LVR (15% deposit) the premium is meaningfully lower. At 95% LVR (5% deposit) it is higher still. LMI premiums are not uniform across lenders — each lender has its own arrangement with its preferred LMI provider (primarily Genworth and QBE in Australia), and the premium for the same LVR and loan amount can vary by $2,000–$5,000 between lenders. Comparing lenders' net costs including LMI is important when borrowing at high LVR.
LMI is not portable between lenders. If you refinance within a few years of borrowing at high LVR, you may be required to pay a second LMI premium with your new lender. This is one of the hidden costs of refinancing early after buying with a small deposit — particularly relevant when interest rate cuts make refinancing attractive to borrowers who only recently settled.
The case for paying LMI rather than saving longer comes down to property price growth during the saving period. If you need 18 additional months to accumulate the extra deposit to avoid LMI, and property prices in your target market rise 8% during that period, the price increase may be larger than the LMI premium you avoided. The property market timing risk is real and historically has favoured buyers who entered the market earlier in rising markets.
The calculation goes the other way in flat or declining markets. If property prices are flat or falling, delaying to build a larger deposit reduces both the LMI cost (lower loan amount) and avoids the risk of paying a high price at the peak. There is no universally correct answer — the optimal decision depends on your specific market, the rate of deposit accumulation, and your view on property price direction, all of which are uncertain.
Several categories of borrower can access high-LVR lending without paying LMI. The Federal Government's Home Guarantee Scheme (including the First Home Guarantee and Family Home Guarantee) allows eligible buyers to purchase with a 5% deposit without paying LMI, with the government guaranteeing the gap. Places are limited each financial year and income and price caps apply. Separately, some lenders offer LMI waivers for specific professions — doctors, lawyers, accountants, and some other professionals can borrow up to 90% LVR without LMI at certain lenders, on the basis of their income stability and earning potential.
If the property being purchased is an investment rather than a principal place of residence, the LMI premium is generally tax-deductible — but over the life of the loan (or five years, whichever is shorter) rather than in the year of purchase. This is a meaningful reduction in the effective cost for investors in high marginal tax brackets, though it does not change the cash outflow at settlement.
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