Lenders mortgage insurance, or LMI, catches a lot of first home buyers out. It shows up late in the process as a line in the costs, it can run to thousands of dollars, and the thing people most often get wrong is who it actually protects. It is you who pays. It is the lender who is covered.

What LMI is

When you borrow a large share of a property's value, the lender takes on more risk. If you stopped repaying and the property sold for less than the loan, the lender could be left short. LMI is a policy the lender takes out to cover that shortfall, and the premium is passed on to the borrower.

It does not protect you if you cannot make repayments. That is a different product, usually called mortgage protection or income protection insurance.

When it applies

The usual trigger is a deposit of less than 20% of the purchase price. Put another way, a loan-to-value ratio (LVR) above 80%. The higher the LVR, the higher the premium. Someone borrowing 95% of the price pays a lot more than someone borrowing 85%.

The premium also depends on the loan size and the lender's insurer, and it varies between lenders, so two banks can quote quite different amounts for the same loan. We can price it for you across lenders rather than guessing.

How it is paid

  • Upfront in cash, as part of your settlement costs.
  • Added to the loan (capitalised). This is common, and it means you are paying interest on the premium for the life of the loan.

Adding it to the loan keeps your cash free for stamp duty and legal costs, but it does raise the balance, and the LVR with it. Which suits you depends on your savings and your plans.

Ways people avoid it

  • Save a 20% deposit. The straightforward option, but in Sydney it can take many years.
  • Use a government scheme. The First Home Guarantee lets eligible buyers purchase with as little as 5% down and no LMI. Eligibility, price caps and places are set by government and change, so check the current rules. We explain how it works in our guide to the 5% deposit scheme.
  • A guarantor. A family member offers equity in their own property as extra security, which can bring the effective LVR under 80%. It carries real risk for the guarantor, so it deserves independent legal advice.
  • Professional packages. Some lenders waive or reduce LMI for certain professions, such as doctors, lawyers and accountants, at higher LVRs. Our guide to home loans for doctors covers one example.

Is paying LMI ever the right call?

Sometimes, yes. If waiting to save the last part of a 20% deposit means prices move further than you save, paying a one-off premium to get into the market earlier can work out. Equally, it can be a poor trade if you are close to 80% and a few more months of saving removes it. This is the kind of decision worth running through with real numbers rather than a rule of thumb.

Can you get it back?

Rarely. Some lenders offer a partial refund if you pay out the loan within the first year or two, but many do not, and refinancing to a new lender generally means paying LMI again if you are still above 80%. If you have built equity since you bought, our article on when to refinance is worth a read.

Talk to someone before you commit

If you are working out how much deposit you need, a broker can show you the LMI cost for your exact scenario across several lenders, along with the alternatives. To start, get in touch or call 1300 001 755. We are licensed credit advisers based in Forestville, helping clients across the Northern Beaches and North Shore.

Frequently asked questions

What is lenders mortgage insurance?

A one-off premium that covers the lender if a borrower with a small deposit defaults and the property sells for less than the loan. The borrower pays it, but it protects the lender.

Do I have to pay LMI with a 10% deposit?

Usually, yes. LMI generally applies when the loan is more than 80% of the property's value, unless you qualify for a government scheme, use a guarantor or hold a profession some lenders waive it for.

Can I add LMI to my home loan?

In most cases, yes. Many lenders let you capitalise the premium, though you then pay interest on it and it increases your loan balance.

Does LMI cost the same at every lender?

No. Premiums differ between lenders and insurers, which is one reason to compare before you choose.

General information only. It does not take your objectives, financial situation or needs into account, and it is not credit or financial advice. Lender policy, rates and eligibility change regularly and vary between lenders — talk to us about your own circumstances before acting on anything here.