By Sergio Stefano, CEO & Head Broker
Lenders Mortgage Insurance is one of the most misunderstood costs in Australian home buying, starting with its name. Here is the plain-English version: LMI is insurance that you pay for but that protects the lender, not you.
Who LMI actually protects
If a borrower defaults and the property sells for less than the loan owing, LMI covers the lender’s shortfall. The borrower who paid the premium gets no protection from it at all, and can even remain liable to the insurer for the shortfall it paid out. It is, bluntly, a fee for being allowed to borrow with a smaller deposit.
When it applies
The common trigger is borrowing more than 80% of the property’s value, what lenders call a loan-to-value ratio, or LVR, above 80%. Buy a $600,000 home with $60,000 down and you are borrowing at 90% LVR: LMI territory at most lenders. The premium scales with both the loan size and how far above 80% you go, which is why the last few percent of deposit can be worth a surprising amount.
What it can cost
Premiums range from a few thousand dollars to tens of thousands on larger loans at high LVRs. Most borrowers capitalise the premium, add it to the loan, which softens the upfront sting but means paying interest on it for up to 30 years. Neither choice is wrong; they are trade-offs to make with open eyes.
The legitimate ways to reduce or avoid it
- A bigger deposit. Boring and effective: at or under 80% LVR, LMI generally disappears.
- A guarantor. An eligible family member’s support can reduce the effective LVR below the trigger. Real obligations for the guarantor: understand both sides first. Our first home buyer page covers this route.
- Government schemes. Commonwealth deposit guarantee schemes allow eligible buyers to purchase with smaller deposits without LMI. Places and criteria change; check what is current.
- Profession waivers. Some lenders waive LMI at higher LVRs for eligible professions. See medico and professional lending.
Is paying LMI ever the right call?
Sometimes, yes. Waiting 2 more years to save the full 20% has its own cost if the market moves while you save. For some buyers, paying LMI to buy years earlier is a rational, deliberate trade. The mistake is not paying LMI; it is paying it accidentally, without knowing the alternatives existed.
The best LMI decision is an informed one, and informed is free: our advice costs you nothing.
This guide is general information only and does not consider your circumstances. Get a feel for your numbers with the borrowing power calculator, then talk to us.