What Is Lenders Mortgage Insurance (LMI) and Do You Have to Pay It?

Investment Loans

8 Oct

Lenders Mortgage Insurance or LMI is one of those home-buying costs that surprises people when they first see it. In simple terms: LMI is an insurance premium the lender takes out to protect itself if a borrower with a small deposit can’t meet repayments and the sale of the property does not cover the outstanding loan. It’s commonly triggered when your loan-to-value ratio, or LVR, is above 80% which means you have less than a 20% deposit.

What LMI actually does and who pays

LMI protects the lender not you as the borrower - it reduces the lender’s risk if a loan goes bad and the lender suffers a shortfall after selling the property. In almost all cases the borrower ends up paying the premium, though some lenders let you add the cost to the loan (capitalise it) instead of paying upfront. Adding LMI to the loan increases how much you owe and your monthly repayments, so it is not free money.

How LMI is calculated

There is no single LMI rate across the market - insurers and lenders price premiums using the loan amount, the LVR, the property value, and sometimes borrower factors. As a rule: the smaller your deposit and the larger the loan, the higher the premium. Typical premiums can range from around 1% up to several percent of the loan amount depending on those factors, so for larger loans LMI can run into tens of thousands of dollars. Use an LMI calculator to get a clearer estimate for your situation.

State stamp duty and other costs

Remember that in some Australian states and territories the LMI premium itself attracts stamp duty or insurance duty which adds to the total cost. Duty rates vary by jurisdiction and can add several percent to the premium, so factor that into your numbers.

Ways people commonly avoid or reduce LMI

Save a 20% deposit so LVR is 80% or lower - this is the simplest way to avoid LMI.
Use a guarantor or family pledge to reduce the LVR on the loan for LMI calculation - this can remove or reduce the premium but it transfers risk to the guarantor.
Choose a smaller or cheaper property so the deposit represents a larger share of value.
Check for eligible government schemes or lender programs that waive or reduce LMI for first home buyers or certain professionals - the Australian Home Guarantee Scheme and some lender programs have changed over time so check current eligibility and dates. Some lenders also have targeted LMI waivers for select professions.

Is LMI always payable if your deposit is under 20%

Generally yes - most lenders will require LMI where the LVR exceeds 80% - but there are exceptions and lender policies differ. Recent policy changes and government guarantee schemes have widened access for some buyers with smaller deposits, meaning fewer people may need to pay LMI in particular circumstances. Always check current offers and schemes because rules and eligibility can change.

Practical considerations: capitalise or pay upfront

If you can afford to pay LMI upfront you avoid interest on the premium and reduce total interest costs over the life of the loan. If you capitalise LMI into your loan you spread the cost but pay interest on it and you may push your LVR higher which can affect future refinance options. Do the maths for both scenarios.

Conclusion

LMI is a lender-focused insurance cost that usually applies when your deposit is below 20% and it can be a sizable one-off expense. It is calculated mainly from your LVR and loan size and may attract extra duties depending on your state.

There are legitimate strategies to avoid or reduce LMI - saving a larger deposit, using a guarantor, checking government guarantee schemes, or looking for lenders with special offers, but each option carries trade-offs that deserve careful consideration. If you’re working through numbers, use an LMI calculator and compare scenarios so you can see the true cost of borrowing at different deposit levels.