If you're buying with a deposit smaller than 20%, you'll likely come across Lenders Mortgage Insurance, or LMI. It's one of the more misunderstood costs of buying a home, partly because of who it actually protects. This guide explains what LMI is, when it applies, and how it fits into your overall borrowing costs.
What LMI Actually Is
Lenders Mortgage Insurance is an insurance policy that protects the lender — not you — if you default on your loan and the sale of the property doesn't cover the outstanding balance. Despite the cost falling on the borrower, the insurance payout goes to the lender, which is why it's important to understand that LMI is not a safety net for you personally.
When Does LMI Apply?
LMI typically applies when your loan-to-value ratio (LVR) is above 80%, meaning your deposit is smaller than 20% of the purchase price. The exact threshold and premium calculation depends on the lender and insurer, and can vary based on your loan size, LVR band, and even your occupation in some cases.
A simple illustration
Two buyers purchase similar $500,000 properties. Buyer A has a 15% deposit ($75,000), giving an LVR of 85%, and is likely to be charged LMI. Buyer B has a 25% deposit ($125,000), giving an LVR of 75%, and is likely to avoid LMI altogether. The difference in deposit size directly determines whether this extra cost applies.
How LMI Is Usually Paid
LMI is generally a one-off premium calculated as a percentage of your loan amount, and it typically increases as your LVR gets higher. Many lenders allow you to add the premium to your loan amount and pay it off over time (known as capitalising the premium), rather than paying it upfront, though this means you'll pay interest on that amount too.
Is Paying LMI Ever a Reasonable Choice?
For some buyers, paying LMI to enter the market sooner with a smaller deposit can make sense, particularly if property prices in their area are rising faster than they can save. For others, waiting and saving a larger deposit to avoid LMI altogether may be the more comfortable path. There's no single right answer — it depends on your goals, your local market, and your comfort with the extra cost.
LMI Is Not Transferable
If you refinance to a new lender, any LMI you've paid generally does not carry over, and a new LMI premium may apply if your LVR with the new loan is still above 80%. This is one of several costs worth weighing up before deciding whether refinancing makes sense for you.
- LMI protects the lender, not the borrower, if a loan defaults.
- It typically applies when your deposit is below 20% (LVR above 80%).
- Premiums can often be added to your loan rather than paid upfront.
- LMI generally doesn't transfer between lenders if you refinance.
Curious how LMI-related costs might affect your repayments? Explore different loan amounts with the Smarter Mortgage Calculator.
This article provides general information only and does not constitute financial, credit, legal or tax advice. Lending criteria, fees and loan conditions vary. Consider speaking with a lender, mortgage broker or appropriately qualified professional before making financial decisions.