Lenders Mortgage Insurance: What It Costs, Who It Protects and How to Avoid It

When LMI applies

Most lenders charge LMI when you borrow more than 80% of the property's value, which means a deposit of less than 20%. The percentage is called the loan-to-value ratio, or LVR. The value the lender uses is the lower of the purchase price and its own valuation, so a low valuation can push you over 80% even when your deposit looked big enough on paper. Some lenders apply LMI at lower thresholds for certain loan types, such as some investment or self-employed loans.

What drives the cost

The premium is a one-off amount, set by the insurer, and it rises steeply as your deposit shrinks. Borrowing at 95% costs far more than borrowing at 85%, and a bigger loan costs more again. The loan type and your circumstances can also affect it. On a typical Sydney purchase with a 5 to 10% deposit, LMI can run into tens of thousands of dollars. Because premiums vary between insurers and lenders, the exact figure only comes from a quote on your actual loan.

Paying upfront or adding it to the loan

You can usually pay LMI in cash at settlement or add it to the loan, which is called capitalising it. Most people capitalise it, because the whole point of a small deposit is not having that cash spare. The trade-off is that you pay interest on the premium for the life of the loan, and it pushes your total borrowing up. Lenders set a limit on how high the loan can go once LMI is added, so it needs to fit inside their maximum.

Why 88% is often the sweet spot

If you're going to pay LMI, how much you borrow matters almost as much as whether you pay it. Many lenders price loans in tiers, and 90% is a common line. Once the total loan, including any LMI you add to it, goes over 90% of the property's value, the interest rate is often higher and the LMI premium steps up as well. Borrowing around 88% leaves room to add the premium and still keep the total under 90%, so you land in the better tier for both. That means a deposit of around 12% plus buying costs. It's worth checking where your numbers sit before you settle on a purchase price, because a small change in deposit or price can move you across that line.

Ways to avoid it

• Save a 20% deposit, plus enough for stamp duty and buying costs.
• Use the Australian Government 5% Deposit Scheme, which lets eligible first home buyers buy with 5% down and no LMI.
• Use a family guarantee, where a relative's property equity covers the gap.
• Check whether your profession qualifies for an LMI waiver. Some lenders offer them to eligible medical, legal and accounting professionals.
• Look at a slightly cheaper property, so your deposit clears the 80% mark.

When paying it can still make sense

Avoiding LMI isn't always the cheapest path. If saving the rest of a 20% deposit would take several more years, you're paying rent in the meantime and prices may move while you wait. For some buyers, paying LMI to buy sooner works out better than waiting. For others, especially if a scheme or guarantee is available, it's money they don't need to spend. The way to decide is to compare the premium against what waiting would realistically cost you, not to treat LMI as automatically good or bad.

Things to know before you pay it

LMI is generally not refundable, and it doesn't move with you. If you later refinance to another lender while you still owe more than 80% of the property's value, you may have to pay it again. That's worth keeping in mind before you lock in a loan you might want to leave in a few years. If the property is an investment, LMI may be claimable as a borrowing expense over time, so ask your accountant how it applies to you.

Questions, answered

Talk it through

General information only, so the next step is applying it to your numbers. Book a chat, email ugur@demir.loans or call 0495 000 228. Free, no obligation.