Buying a home in Australia without a 20% deposit often means paying Lenders Mortgage Insurance (LMI). While most people see it as just another cost, what many don’t realise is that LMI protects the bank—not the borrower—and can still leave you liable if you default. In this guide, written by expert mortgage brokers, we’ll explain what really happens if you can’t repay your loan, how LMI differs from other types of insurance, and the special circumstances where you might be able to avoid it altogether.
Table of Contents
Quick Summary
- Lenders Mortgage Insurance (LMI) is a one-time insurance fee that protects the bank if a borrower defaults on their loan.
- LMI is typically required when borrowing over 80% of the property value.
- It allows buyers to enter the property market with a lower deposit.
- LMI costs vary depending on the loan amount, property value, and lender.
- There are ways to avoid LMI, such as increasing deposit, finding a guarantor, or seeking professional advice.
Why Do You Need Lenders Mortgage Insurance?
Banks require lenders mortgage insurance for high-risk loans such as borrowing a high percentage of the property value or when you have a lower deposit.
As a general guide, the lender’s mortgage insurance will become applicable when lending over 80% of the property value (also known as loan-to-value ratio).
You’ll pay LMI if you have less than a 20% deposit.
Self-employed clients who want to apply for a low-doc loan will usually have lenders mortgage insurance applied to them when borrowing over 60-70% of the property. This is because they are unable to adequately prove income.
The premium the insurer charges varies depending on the loan amount and the property value.
Who Does Lenders Mortgage Insurance Protect?
Around 20% of home loans in Australia get LMI coverage, but still, only a few buyers are aware of what it actually is and why the lender charges it.
Lender’s mortgage insurance or LMI is a type of insurance that provides protection to a lender (home loan providers and banks) against any risk of default by the borrower. Some borrowers have a misconception that they pay this for their own protection.
One study has shown that 40% of people do not know what lender’s mortgage insurance is.
2018 white paper by Mortgage Choice and Core Data’s Evolving Great Australian Dream showed that 42%of 1000+ respondents did not know what LMI is.32% said that they need it to purchase a house. 18%of the respondents believed that it is designed to safeguard both buyers and sellers, 8% said that it protects borrowers and only 32%knew exactly why they needed this insurance.
LMI vs Mortgage Protection Insurance
It’s easy to confuse LMI with mortgage protection insurance, but they are very different products:
Feature | LMI | Mortgage Protection Insurance |
Who it protects | Lender | Borrower |
When it applies | Required when borrowing over 80% LVR | Optional |
Cost structure | One-off premium added to loan | Ongoing premiums |
Covers what | Lender’s loss if you default | Borrower’s repayments in case of illness, death, or job loss |
This distinction is crucial—many buyers mistakenly believe their LMI premium protects them personally, which it does not.
What Are The Benefits Of Lenders Mortgage Insurance?
LMI can be quite useful, especially when property values are rising, because if you own your property for just a year, your home equity level increases and this will cover the cost of the lender’s mortgage insurance.
It allows you to get into the property market with a lower deposit, like less than 20% of the property value, which means you can get in sooner rather than having to wait and save up a big deposit.
Read More: 11 Hidden Costs of Buying a Home
What Are The Downsides Of LMI?
The cost of LMI can be quite high, and in many cases, it restricts a borrower from refinancing as they would have to pay this cost again if LVR (loan to value ratio) remains over 80 per cent. Read more about how to calculate LVR.
Moreover, LMI decreases the overall return on investment and cannot be refunded.
In other words, once you pay LMI on the loan when you go to refinance or sell the property, it is a cost that has to be paid upfront on the loan.
Do You Pay LMI When Refinancing?
You need to pay LMI when refinancing with another bank if your loan-to-value ratio or LVR is above 80%. Unfortunately, you will still need to pay Lenders Mortgage Insurance when refinancing your loan, even if you paid it when you initially purchased your property.
For example, if you wanted to refinance your home valued at $600,000 and you owed $500,000, the LVR would be calculated as 83.33% and being over 80% LVR, you would still need to pay LMI.
Read More: 7 Reasons to Refinance your Home Loan
What Does Lenders Mortgage Insurance Cost?
Lenders Mortgage Insurance costs vary depending on the lender.
Property Value | Deposit (%) | Loan Amount | Estimated LMI Cost |
$800,000 | 15% | $680,000 | $9,275 |
$800,000 | 10% | $720,000 | $19,087 |
$800,000 | 5% | $760,000 | $34,276 |
$900,000 | 15% | $765,000 | $10,434 |
$900,000 | 10% | $810,000 | $21,473 |
$900,000 | 5% | $855,000 | $38,560 |
Read More: 11 Hidden Costs of Buying a Home in Brisbane
LMI For Investment Properties In Australia
When it comes to investment properties, LMI rules can be slightly different:
- Higher LMI costs: Lenders often view investment properties as higher risk, which can result in higher LMI premiums.
- Lower maximum LVR: Some lenders may only allow up to 90% LVR on investment properties, compared to 95% for owner-occupied homes.
- Tax deductibility: In Australia, LMI premiums for investment properties are generally tax-deductible over five years.
- Stricter lending criteria: Banks may have stricter lending criteria for investment properties, which could affect your ability to avoid LMI.
If you’re considering an investment property, it’s crucial to factor in these LMI considerations when planning your purchase.
Try The Lenders Mortgage Insurance Calculator
Using our Lenders Mortgage Insurance calculator, you can work out what LMI will roughly cost to purchase or refinance your home. Just enter the estimated purchase price (or property value) and how much you would like to lend, and we will calculate the LMI for you.
Our LMI Calculator also finds ways of Avoiding Lenders Mortgage Insurance based on your job type. So, If you are a Doctor, Medical Professional or work in a few other types of professions, you may be able to have LMI Waived. Talk to our team to find out more.
Why Is LMI So Expensive?
Lenders mortgage insurance is very expensive as it represents a significant cost to the loan.
Therefore, whenever you plan to buy a house, it is important to seek the advice of a financial expert or a real estate broker, as they will be able to guide you in the right direction whilst keeping your financial goals in mind.
The cost of LMI depends on various factors, such as
- Loan amount
- Level of home equity
- Whether you are a first-time home buyer or an investor, and
- The risk associated with a particular loan package you are planning to buy
- The particular bank or lending institution
It’s important to understand that each case is different and dealt with differently. Therefore speak to our team of experts about your personal financial situation.
Having the right person guiding you will help you save a lot of money on LMI and will allow you to make home loan repayments on a timely basis, making it possible for you to repay the loan in full.
How To Avoid LMI
There are several ways you can avoid paying LMI.
Increase Amount of Deposit
- You can purchase a home without having to pay lenders mortgage insurance. For that, you need to have raised a reasonable deposit. If you have a small deposit and your loan-to-value ratio is more than 80%, the risk of loss for the lender increases. On the other hand, having a bigger deposit means the loan amount will be lower; hence, lending to you will be a lower risk for the lender.
- You do not have to pay Lender’s Mortgage Insurance if you have a deposit worth 20% of the property value. Therefore, you need to decide whether the dream of buying a new home should be delayed while you save a little more money or if you should buy a property sooner with the added cost of the lenders mortgage insurance.
Find a Guarantor
- If you don’t have 20% of the loan, finding a guarantor can be a good option to avoid LMI costs. Your guarantor will ensure they will cover a part of your loan if you fail to make the loan payment.
- The guarantor can be the ‘bank of your parents’ that provides financing for your home with a loan or cash gift. The amount paid by a guarantor can also add up to your deposit and enable you to avoid the lenders mortgage insurance payment.
Seek Professional Advice
- Last but not least, always seek professional advice. A mortgage express broker can assess your financial position. Your broker can also help you secure the right finance source that aligns with your financial goals. Certain jobs and professions are eligible to have LMI Waived.
LMI Waivers & Special Cases
Not everyone has to pay LMI. Some borrowers qualify for waivers or reductions, depending on their circumstances:
- Professional Packages: Certain high-demand professions such as doctors, accountants, lawyers, and pharmacists can often borrow up to 90–95% without paying LMI.
- First Home Buyer Initiatives: From time to time, lenders run promotions or government schemes that reduce or eliminate LMI for first home buyers.
- Guarantor Support: A family member can use the equity in their property as additional security, which can remove the need for LMI altogether.
Read more: LMI Waivers
Can I Get An LMI Refund?
Several banks have changed their agreement with LMI providers in order to help customers so that they can pay lower premiums. Unfortunately, most of these changes happened in 2012, so if you have gotten your loan since then, you probably do not qualify for an LMI refund.
Is it possible to transfer an LMI Policy?
The answer is no. You cannot transfer your LMI policy to another bank. However, if you stick with the same lender, you can get a discount on a new LMI premium. This can happen if you internally refinance your loan or increase the existing loan amount.
Bonus: What Happens If You Default with LMI?
Most borrowers assume that once LMI is paid, they are no longer liable if things go wrong. The reality is different. If you default and your property sells for less than the outstanding loan, the lender claims on the LMI policy to cover the shortfall. However, the insurer can then seek repayment of that amount from you. In cases of genuine financial hardship, insurers may offer repayment plans, but the debt remains your responsibility.
Shortfall Scenario: $950,000 Home
Imagine you take out a loan of $855,000 on a $950,000 property. Unfortunately, you default on your mortgage. The property then sells for $900,000, which is $55,000 less than your outstanding loan.
In this scenario, the Lenders Mortgage Insurance (LMI) insurer pays $55,000 to the lender to cover the shortfall. However, the insurer can then seek repayment of that $55,000 from you.
Lenders Mortgage Insurance FAQs
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is a one-time premium that protects the lender if you default on your loan. It’s usually required when borrowing more than 80% of a property’s value.
What is LMI in a home loan?
In a home loan, LMI is the insurance premium charged when your deposit is less than 20%. It enables you to buy a property sooner but does not protect you as the borrower.
What does LMI cover?
LMI covers the lender’s financial loss if a borrower defaults on the loan and the property sells for less than the outstanding balance. It does not cover the borrower.
Does LMI protect me if I lose my job or become ill?
No. LMI only protects the lender. If you want cover for your repayments in case of job loss, illness, or death, you’ll need mortgage protection insurance or income protection.
How is LMI calculated?
LMI is calculated based on the loan amount, loan-to-value ratio (LVR), and sometimes the property type. The higher your LVR and loan size, the more expensive LMI will be.
How much does LMI cost?
LMI costs vary depending on the lender and deposit size. For example, on a $800,000 property with a 10% deposit, LMI could cost around $19,087.
Is LMI paid upfront?
Yes, LMI is a one-off premium due at settlement. However, most lenders allow you to add (capitalise) the LMI onto your home loan and pay it off over time.
Does LMI get added to the mortgage?
In most cases, yes. LMI can be added to your total loan amount, so you don’t need to pay it out of pocket upfront. This increases the overall loan balance and interest paid.
Can I avoid paying LMI?
Yes. You can avoid LMI by saving a 20% deposit, using a guarantor, or working in certain professions (like doctors or accountants) where lenders may waive LMI up to 90–95% LVR.
What happens if my property sells for less than I owe?
If you default and the property sells for less than the loan balance, the LMI provider pays the shortfall to the lender. However, the insurer may then pursue you for that debt.
Is LMI tax deductible?
For owner-occupiers, LMI is not tax deductible. For property investors, LMI may be claimed as a tax deduction over five years under Australian tax rules.
Do I pay LMI when refinancing?
If your new loan has an LVR above 80%, you may need to pay LMI again when refinancing, even if you already paid it on your original mortgage.
Is LMI refundable?
Generally, LMI is non-refundable. Some lenders may offer partial refunds if the loan is repaid or refinanced within the first 1–2 years, but this is uncommon.
What are the benefits of paying LMI?
The main benefit is earlier market entry. LMI allows buyers with smaller deposits (as low as 5–10%) to purchase property sooner, rather than waiting years to save 20%.
Are there alternatives to LMI?
Yes. Some lenders charge a “lender risk fee” instead of LMI. Others waive LMI for eligible professionals or under special schemes for first home buyers. A guarantor loan is another common alternative.
Next Steps And Getting Your Home Loan…
Now that you understand Lenders Mortgage Insurance, here are your next steps:
- 1. Assess your deposit: Determine how close you are to a 20% deposit and whether waiting to save more is feasible.
- 2. Compare lenders: Different lenders have varying LMI costs and policies. Shop around or speak with a mortgage broker to find the best deal.
- 3. Consider LMI alternatives: Explore options like family guarantees or professional packages that may help you avoid LMI.
- 4. Get pre-approval: Once you’ve chosen a lender, get pre-approved for a loan to understand your borrowing capacity and LMI costs.
- 5. Seek professional advice: Consult with a financial advisor or mortgage broker to ensure you’re making the best decision for your circumstances.
Remember, while LMI can be a significant cost, it may be worth paying if it means entering the property market sooner in a rising market. Carefully weigh your options and seek expert advice to make the best decision for your financial future.
We can tell you if LMI can be waived for your mortgage!
Call us on 1300 088 065 or fill out our online assessment form.
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