What Is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a one-off premium charged when you borrow more than 80% of a property's value. It protects the lender, not you, if you default on the loan and the property sale doesn't cover the outstanding debt.
Under the prudential standard that regulates Australian banks and authorised deposit-taking institutions, LMI must provide cover for all losses up to at least 40% of the higher of the original loan amount or the outstanding balance. The insurance is provided by APRA-regulated insurers and allows lenders to lend at higher loan-to-value ratios while managing their capital requirements.
You pay the premium even though the policy protects the lender. The cost is calculated on a sliding scale based on your loan amount and LVR. A borrower with a 10% deposit on a property at the current median for their area might pay anywhere from a few thousand dollars to over $20,000 in LMI, depending on the lender, loan amount, and whether they're an owner-occupier or investor. The premium is either paid upfront at settlement or capitalised into the loan amount. If you choose to capitalise it, you'll pay interest on the premium over the life of the loan.
How the LVR Calculation Works
Your LVR is the loan amount divided by the property value, expressed as a percentage. If you're borrowing $450,000 to purchase a property valued at $500,000, your LVR is 90%. That 10% shortfall between your deposit and the 20% threshold is what triggers the LMI charge.
Lenders calculate LVR on the lower of the purchase price or the lender's valuation. If you agree to pay $520,000 but the lender's valuer assesses the property at $500,000, your LVR is calculated on $500,000. That means your deposit, in real terms, just became smaller relative to the loan you need.
Where multiple loans are secured over the same property in sequential ranking with no other lender in between, the loan amounts are aggregated and treated as a single exposure for LVR purposes. If you take out a first mortgage of $400,000 and a second mortgage of $50,000 with the same lender on a property valued at $500,000, the LVR is calculated as 90%, not 80% on the first loan and 10% on the second.
When LMI Is Charged
LMI applies when your deposit is less than 20% of the property value. The premium increases as your deposit decreases. At 85% LVR, the charge is moderate. At 95% LVR, it can be substantial.
Consider a buyer with a 5% deposit purchasing a unit. They're borrowing 95% of the property value. The LMI premium on a loan of that size might add $15,000 to $25,000 to their costs, depending on the lender and loan structure. If they capitalise that premium into the loan, they're now borrowing even more than 95% of the property's original value, and they'll be paying interest on the insurance premium for the length of the loan term.
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Investment loans generally attract higher LMI premiums than owner-occupied loans at the same LVR. Lenders view investment borrowing as higher risk, and that risk is reflected in the insurance pricing. A 90% LVR investment loan will cost more to insure than a 90% LVR owner-occupied loan on a property of the same value.
LMI and Government Guarantee Schemes
The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a 5% deposit without paying LMI. Housing Australia guarantees up to 15% of the property value, bringing the combined deposit and guarantee to 20%. Single parents or legal guardians can purchase with a 2% deposit, with a guarantee of up to 18%.
Applications are made through participating lenders, not directly through Housing Australia. No income caps apply, and there are no annual limits on the number of places available. Property price caps vary by state and location. In New South Wales, the cap is $1,500,000 in capital cities and regional centres and $800,000 in other areas. In Victoria, it's $950,000 in capital cities and regional centres and $650,000 elsewhere. In Queensland, the cap is $1,000,000 in capital cities and regional centres and $700,000 in other areas.
Both the purchase price and the lender's valuation must sit at or below the applicable cap. If the valuation comes in under the contract price, you may need to increase your deposit or negotiate the price down to remain eligible. The scheme cannot be combined with Help to Buy, though it can generally be used alongside state and territory stamp duty concessions and grants, depending on the jurisdiction.
How the Premium Is Calculated
LMI premiums are not standardised across lenders. Two lenders offering the same loan amount at the same LVR can charge different premiums because they use different insurers or negotiated pricing arrangements. The calculation takes into account your loan amount, your LVR, whether the loan is for an owner-occupied or investment property, and in some cases your employment type or income structure.
Self-employed borrowers and those with non-standard income may face higher premiums or additional assessment layers. Some lenders apply a loading to the LMI premium if you're purchasing in a regional area or a location the insurer views as higher risk. Others don't. There's no published rate card you can rely on. The only way to know what you'll pay is to submit a full application and receive a quote from the lender.
State and territory stamp duty on the LMI premium applies in some jurisdictions. In New South Wales, duty is charged on the premium at the rate applicable to general insurance. In other states, LMI premiums may be exempt or concessionally treated. The duty, if applicable, is in addition to the premium itself and is usually capitalised into the loan along with the LMI cost.
Avoiding LMI With a 20% Deposit
The most direct way to avoid paying LMI is to save a deposit of at least 20% of the property value, plus enough to cover stamp duty and other settlement costs. At that LVR, the lender's capital requirement is lower, and no insurance is required.
A borrower purchasing at the median for their suburb with a 20% deposit avoids the premium entirely but must fund the deposit through genuine savings, equity in another property, or a gift from a family member that meets the lender's requirements. Lenders assess where your deposit has come from. Funds that appear suddenly in your account without a clear explanation, or funds sourced from a personal loan or credit card, won't be accepted as genuine savings.
Some buyers use a guarantor to reach the 20% threshold without holding that amount in cash. A parent or family member offers their property as additional security, reducing the lender's exposure and removing the need for LMI. The guarantor remains liable for the portion of the loan they've guaranteed until the borrower builds enough equity to release them, usually within a few years if repayments are made on time and property values hold or increase. Not all lenders offer guarantor loans on the same terms, and some exclude certain property types or locations from guarantor arrangements.
What Happens if You Refinance
If you refinance to a new lender before your LVR has dropped below 80%, you may be required to pay LMI again. The premium you paid on your original loan doesn't transfer. Each new loan is assessed independently, and if you're still borrowing more than 80% of the property's current value, the new lender will charge a fresh premium.
Property values can fall as well as rise. If you purchased during a peak and values have since declined, your LVR might be higher at refinance than it was at purchase, even if you've been making regular repayments. In that scenario, LMI on the new loan could be more than you paid the first time.
Some lenders offer LMI portability, allowing you to transfer your existing loan to a new property without paying a second premium, provided the new LVR is equal to or lower than the original loan. Portability terms vary, and not all lenders or LMI providers offer it. If you're planning to upgrade or relocate within a few years of purchase, confirm whether your lender's LMI policy is portable before committing to the original loan.
If you're weighing up whether to pay LMI now or wait until you've saved a larger deposit, call one of our team or book an appointment at a time that works for you. We'll run the numbers on your situation and show you what each option looks like over the term of the loan.
Frequently Asked Questions
Do I get anything from Lenders Mortgage Insurance?
No. LMI protects the lender if you default and the property sale doesn't cover the debt. You pay the premium but receive no direct benefit or coverage from the policy.
How much does LMI cost on a 10% deposit?
The cost depends on your loan amount, property value, and whether you're an owner-occupier or investor. Premiums can range from a few thousand dollars to over $20,000. The only way to know is to get a quote from your lender.
Can I avoid LMI with a government scheme?
Yes. The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a 5% deposit without paying LMI, using a government guarantee instead. Property price caps and other conditions apply.
Do I pay LMI again if I refinance?
You may need to pay LMI again if your LVR is still above 80% when you refinance to a new lender. The original premium doesn't transfer. Some lenders offer portability if you're moving to a new property with the same lender.
Is LMI charged on investment loans?
Yes. LMI applies to investment loans when the LVR is above 80%, and premiums are generally higher than for owner-occupied loans at the same LVR because lenders view investment borrowing as higher risk.
