Lenders Mortgage Insurance (LMI) is insurance that protects the lender—not you—if you default on your home loan and the property sale doesn't cover the debt. Despite protecting the lender, you pay for it as a one-off fee added to your loan.
When Do You Pay LMI?
LMI is required when your LVR (Loan to Value Ratio) exceeds 80%. In other words, if your deposit is less than 20% of the property value.
Examples:
- $500,000 property, $400,000 loan (80% LVR): No LMI
- $500,000 property, $450,000 loan (90% LVR): LMI required (~$15,000)
- $500,000 property, $475,000 loan (95% LVR): LMI required (~$25,000)
How Much Does LMI Cost?
LMI is calculated based on:
- Loan amount
- LVR percentage
- Property value
Example LMI Costs (Approximate)
$500,000 Property:
- 85% LVR ($425K loan): ~$10,000 LMI
- 90% LVR ($450K loan): ~$15,000 LMI
- 95% LVR ($475K loan): ~$25,000 LMI
$800,000 Property:
- 85% LVR ($680K loan): ~$18,000 LMI
- 90% LVR ($720K loan): ~$26,000 LMI
- 95% LVR ($760K loan): ~$40,000+ LMI
Note: Actual costs vary by lender and LMI provider (Genworth, QBE).
Do You Pay LMI Upfront?
You have two options:
1. Add LMI to Your Loan (Most Common)
The LMI cost is added to your loan amount, so you don't pay it upfront—but you pay interest on it for 25-30 years.
Example:
- Loan: $450,000
- LMI: $15,000
- Total loan: $465,000
- You repay the $15,000 + interest over 30 years (~$30,000 total cost)
2. Pay LMI Upfront
Pay cash at settlement to avoid paying interest on it.
How to Avoid LMI
1. Save a 20% Deposit
The simplest way—if your LVR is 80% or below, you don't pay LMI.
Example: $600,000 property
- $120,000 deposit (20%): No LMI
- Savings: $15,000-$25,000
2. Use the First Home Guarantee
The government guarantees your loan, so lenders don't charge LMI even with a 5% deposit.
Example:
- $650,000 property
- $32,500 deposit (5%)
- LMI: $0 (saved ~$25,000!)
Eligibility: First home buyers earning under $125K (singles) or $200K (couples).
3. Use a Family Guarantee
A family member (usually parents) uses their property as additional security, reducing your effective LVR to below 80%.
Example:
- You're buying a $500,000 property with a $50,000 deposit (90% LVR)
- Parents guarantee $100,000 using their home equity
- Effective LVR: 80%
- LMI: $0
4. Certain Professions Get LMI Waivers
Some lenders waive LMI for:
- Medical professionals (doctors, dentists, vets)
- Legal professionals (lawyers, barristers)
- Accountants (with certain qualifications)
Example: A doctor buying a $600,000 property with a $60,000 deposit (90% LVR) may get LMI waived entirely—saving $15,000-$20,000.
Is LMI Refundable?
Generally, no. If you refinance or sell within a few years, LMI is not refunded. However, some lenders offer LMI portability—if you sell and buy a new property with the same lender, your LMI may transfer to the new loan (check with your lender).
LMI vs Mortgage Protection Insurance
Don't confuse these:
- LMI (Lenders Mortgage Insurance): Protects the lender if you default. You pay for it, but it doesn't help you.
- Mortgage Protection Insurance: Protects you (covers repayments if you lose your job, get sick, or die). Optional insurance you can buy.
Should You Pay LMI or Wait to Save 20%?
It depends on your situation:
Pay LMI if:
- Property prices are rising fast (e.g., 10%/year)—waiting 2 years to save could mean paying $100,000 more for the same house
- You have stable income and can afford repayments
- You're eligible for government schemes or family guarantees
Wait and save 20% if:
- Property prices are stable or falling
- You can save the extra deposit within 12-18 months
- You want to minimize total loan costs
Example calculation:
- LMI cost: $15,000
- Waiting 2 years to save $100,000 deposit
- Property price increase: 10%/year = $103,000 increase over 2 years
Outcome: You "saved" $15,000 in LMI but paid $103,000 more for the property. Paying LMI and buying now would have been cheaper.
Final Thoughts
LMI is expensive ($10,000-$40,000 for most buyers), but it's not necessarily a deal-breaker:
- Use government schemes (First Home Guarantee, Family Guarantee) to avoid it
- Compare LMI costs to property price growth in your area
- Speak to a NIK Finance broker about LMI waivers for your profession or strategies to reduce/avoid it
Remember: A 20% deposit isn't always required to buy a home—you just need to be smart about how you structure your loan.