How does Lenders Mortgage Insurance work?
Found the perfect place but not quite there on the deposit?
You’ve been house hunting, maybe even found the one. But there’s a catch — property prices keep climbing and your savings haven’t quite hit that 20% deposit target (plus extras like stamp duty... yep, that one hurts).
Good news: you might not have to wait.
Some lenders are open to approving a home loan with less than a 20% deposit. Sounds promising, right? It is — but it also means the lender is taking on more risk.
That’s where Lenders Mortgage Insurance (LMI) comes in.
So, what actually is LMI?
Lenders Mortgage Insurance is a type of insurance your lender takes out to protect themselves — not you — in case your home loan goes south.
If you can’t make your repayments and the lender has to sell your home, there’s a risk they won’t recover the full amount of the loan (especially after sale costs). LMI helps cover that potential loss.
It’s important to know: you pay for LMI, but it only benefits the lender.
How does LMI work in real life?
It’s pretty straightforward.
If you don’t have the full 20% deposit, the lender might still give you the loan, but they’ll take out an LMI policy. You’ll cover the cost of that insurance, either upfront or added to your loan (which means you’ll pay interest on it too).
- The lender pays a premium to a mortgage insurer (usually around the time your loan is settled).
- The cost of this insurance is passed on to you. It will be clearly shown in your home loan documentation.
- You either pay it upfront or roll it into your loan. If it’s added to your loan, your monthly repayments go up a little.
An example:
You’re buying a $600,000 home and borrowing $560,000.
Let’s say the LMI premium is $15,000.
You could choose to borrow $575,000 instead, covering the LMI as part of your mortgage.
That could mean an extra $60/month in repayments, and around $7,000 more in interest over 30 years (based on a 2.79% interest rate).
Who gets the LMI payment?
LMI is paid to a mortgage insurer — there are a few in Australia. Some lenders have preferred providers or even use their own in-house insurer.
It’s not usually something you can choose or shop around for.
How long does LMI last?
Generally, LMI covers the entire duration of the loan — up to 30 years in some cases.
It sticks around as long as the lender wants protection, regardless of whether your equity grows over time.
What does LMI cost?
It varies quite a bit. The LMI premium depends on how much you’re borrowing compared to the property’s value — also known as the loan-to-value ratio (LVR) — and your deposit size.
A rough example:
If you’re taking out a $500,000 loan with only a $50,000 deposit (so a 90% LVR), you might be looking at over $10,000 in LMI premiums.
Factors like whether the property is owner-occupied or an investment can also influence the cost.
Can I reduce or avoid LMI?
- Save a bigger deposit — not the fastest option, but the most effective.
- Use a guarantor — like a family member who offers equity in their property to back your loan.
- Check for government schemes — like the First Home Guarantee (if you’re eligible).
- Look for lenders with alternative LMI structures — some may offer monthly LMI instead of one big upfront cost.
- Team up with someone — going in on the purchase with someone else could boost your deposit.
So… is LMI a bad thing?
Not necessarily.
Yes, it’s an extra cost and ideally avoided. But if it gets you into the market years earlier — especially when prices are climbing — it might actually save you money in the long run.
For instance, if paying $5,000 in LMI helps you stop renting and get into your own place sooner, that could be a smart move.
It all comes down to your goals, your budget, and how soon you want to buy.
Final thought
LMI isn’t fun to pay, but it can be a useful tool for buyers who are ready to jump into the market before hitting that magic 20% deposit.
Just make sure you understand the cost, weigh up your options, and think about the bigger picture — your future in your own home.