What is LMI and how much does it cost?

Lenders mortgage insurance is a one-off insurance premium that covers the lender against loss if a borrower defaults and the property sells for less than the debt. You pay it; the lender is the beneficiary. It buys you nothing directly — no protection if you lose your job, no cover if you can't make repayments — but it is the mechanism that makes lending above 80% LVR possible at all, so in practice it buys you years of not saving.

When it applies

The trigger is your loan-to-value ratio: the loan divided by the lender's assessed value of the property, which is not always the price you paid. Above 80% LVR, expect LMI. At exactly 80% or below, there is none. Some lenders use a slightly different product called a low-deposit premium or risk fee, which behaves the same way from your side of the table.

What drives the premium

Three things move it: your LVR, the size of the loan, and whether you're an owner-occupier or investor. The relationship is not linear — the premium at 95% LVR can be several times the premium at 85% on the same loan. Loan size then multiplies it, so a large loan at a high LVR is where the numbers get genuinely uncomfortable. Each insurer publishes its own rate table and lenders apply their own scales, which is why the same purchase can attract quite different premiums at two lenders.

Capitalising it

Most lenders let you add the premium to the loan rather than paying it in cash, provided the total including the premium stays within their maximum LVR (commonly 95% plus the capitalised premium). This is what almost everyone does, but be clear about the consequence: you're borrowing the insurance and paying interest on it for the life of the loan, so a few thousand dollars of premium can cost considerably more across thirty years.

Waivers and exemptions

Some professions attract an LMI waiver that allows borrowing up to 90% — and occasionally higher — with no premium at all. The eligible lists vary by lender and typically cover medical practitioners, and at some lenders accountants, lawyers, and other specified professionals with membership of a recognised body. The federal Home Guarantee Scheme achieves the same outcome for eligible first home buyers by having the government guarantee the shortfall instead. A family guarantee that brings the loan to 80% removes LMI too. If you might qualify for any of these, it's worth checking before you accept a premium as unavoidable.

It isn't portable, and refunds are limited

LMI attaches to that loan and that property. Refinance to another lender, or buy a different home, and you pay again if you're still above 80%. Partial refunds exist if the loan is discharged very early — usually within the first one or two years, on a sliding scale — but they're the exception rather than something to plan around. This is also a good argument for choosing the right lender the first time rather than fixing it later.

How to decide

Treat the premium as the price of buying now. Put it next to what another year or two of saving would cost you in rent, in likely price movement, and in the opportunity you're passing up — then decide with the actual figures in front of you instead of a rule of thumb. We'll get you a real premium quote for your specific LVR and loan size before you commit to anything.

The information on this website is general in nature and does not take into account your personal objectives, financial situation or needs. Before acting on any information you should consider whether it is appropriate for you. Terms, conditions, fees, charges and normal lending criteria apply. Rates are subject to change.