Guide · Loan basics
Lenders Mortgage Insurance Explained (and How to Pay Less of It)
LMI is one of the most misunderstood costs in a home purchase. People assume it protects them. It doesn't. Here's what it actually is, what drives the price, and the legitimate ways to pay less.
Lenders Mortgage Insurance, or LMI, is a one-off premium you pay when your deposit is under 20 percent of the property value. The key thing to understand: it protects the lender, not you. If you default and the lender sells the property for less than you owe, the insurer covers their shortfall. You pay the premium, the lender gets the cover. It feels unfair when you first hear it, and I get that, but there's a logic to it, and there are ways to reduce it.
Why it exists
A smaller deposit is a higher risk for the lender. LMI is what lets them say yes to a loan they'd otherwise decline, which is actually good news for buyers who don't have 20 percent saved. Without it, the only path in would be a full 20 percent deposit or a guarantor. So while nobody enjoys paying it, LMI is often the thing that gets you into the market years earlier.
What drives the premium
The premium is worked out mainly from your LVR (loan to value ratio) and the size of the loan. The higher your LVR, the steeper the rate climbs, and it climbs fast between 90 and 95 percent. The table below shows rough ballpark ranges. Actual premiums depend on the insurer, the lender and your loan size, so treat these as illustration, not a quote.
| Your deposit | LVR | Ballpark premium |
|---|---|---|
| 15 percent | 85 percent | Around 0.5 to 1 percent of the loan |
| 10 percent | 90 percent | Around 1.5 to 2.5 percent of the loan |
| 5 percent | 95 percent | Around 3 to 4 percent of the loan |
The jump is real
Because the rate rises so sharply near the top, a slightly bigger deposit can cut the premium more than you'd expect. Getting from a 95 to a 90 percent LVR, or from 90 to 88, can save thousands. It's worth checking whether a little more deposit pushes you over one of those lines.
How to pay less LMI, or none
- Save a bigger deposit. Even a few percent more can move you into a cheaper band, or clear 20 percent and remove LMI altogether.
- Use a government guarantee. Eligible first home buyers may be able to buy with as little as 5 percent deposit and no LMI, because the government guarantees the gap. Eligibility and caps change, so check yours.
- Bring in a family guarantor. A parent using equity in their home as security can push your effective LVR under 80 percent, removing LMI without anyone handing over cash.
- Check professional waivers. Some lenders waive LMI for certain occupations, such as medical and legal professionals and some accountants, even with a smaller deposit. If that's you, it's worth asking.
- Capitalise it if the maths works. Many lenders let you add the premium to the loan rather than pay it upfront. That eases the cash crunch at settlement, though you then pay interest on it, so it's a trade-off.
One premium, one lender
LMI usually isn't transferable between lenders. If you refinance soon after buying with a high LVR, you could face a fresh premium. That's one more reason to get the lender and structure right the first time, which is exactly what I help with.
LMI isn't automatically a bad deal. For a lot of buyers, paying it and getting into the market now beats renting for another three years while prices move. The trick is knowing your options, and picking the deposit level and lender that keep the cost sensible. Have a look at the deposit guide next, or see how I help first home buyers weigh it up.
Wondering how much LMI you'd pay?
Tell me your deposit and target price and I'll estimate the premium, and whether a guarantee or guarantor could remove it.
Frequently asked questions
Does LMI protect me if I can't pay my loan?
No. This is the biggest misconception about it. LMI protects the lender if you default and they're left short after selling the property. You pay the premium, but the cover is entirely for them. If you want protection for yourself, that's income protection or mortgage protection insurance, which are separate products.
Can I get a refund on LMI if I sell or refinance early?
Some insurers offer a partial refund if you cancel within the first year or two, but many don't, and the amounts are small. As a rule, treat LMI as a cost you won't get back. That's why it pays to set the loan up right rather than plan to refinance out of it quickly.
Is it better to pay LMI or wait and save 20 percent?
It depends on how fast prices are moving where you're buying and how quickly you can save. If prices are rising faster than your savings, paying LMI to buy sooner can leave you ahead. If you're close to 20 percent already, holding out often makes sense. I can run both scenarios with you.
Important information
This information is general in nature and does not take your personal objectives, financial situation, or needs into account. It is not credit assistance or a recommendation to enter into any particular credit contract. Consider whether it is right for you and seek advice before acting. Lending is subject to a lender's eligibility and approval criteria. Terms, conditions, fees, and charges apply.
Greenwood Finance · ABN 23 671 049 693 · Credit Representative No. 551942.
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