Lenders Mortgage Insurance is one of the larger costs of buying with a small deposit, and one of the least understood. It is worth knowing what it is before you budget around it, because most buyers assume it protects them and it does not.
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Lenders Mortgage Insurance protects the lender, not you. If you borrow with less than a 20% deposit and later default, LMI covers the bank’s shortfall. You pay for it.
That is the whole thing in three sentences, and it is worth being clear about, because a lot of buyers assume it protects them.
When you pay it
Whenever your loan-to-value ratio is above 80% — that is, when your deposit is under 20% of the purchase price. Below that threshold there is no LMI.
What it costs
It depends on two things: how much you are borrowing, and how far under 20% your deposit is. The premium rises steeply as the deposit shrinks, so the difference between a 15% and a 10% deposit is much larger than the five points suggest.
The premium is normally added to your loan rather than paid upfront, which means you also pay interest on it for the life of the loan. On a thirty-year term that turns a one-off premium into a considerably larger number. Ask your lender for the total cost over the loan term, not just the premium.
How to avoid it
- Save a 20% deposit. The direct route, and often the most expensive in waiting time while prices and rents move.
- Use a guarantor. A family member offers equity in their property as additional security, which brings your effective deposit above the threshold. It puts their property at risk, so both sides need to understand the arrangement properly.
- Use a government scheme. The First Home Guarantee lets eligible buyers purchase with a 5% deposit and no LMI. The Family Home Guarantee does something similar for eligible single parents.
- Check your profession. Some lenders waive LMI entirely for certain occupations — medical professionals most commonly, and in some cases lawyers, accountants and other licensed professionals. Worth asking about before you assume you have to pay.
- Buy something cheaper. A smaller purchase price turns the same savings into a larger percentage deposit.
Is paying it ever the right call?
Sometimes. LMI is a cost, but so is waiting. If rents are rising and you are paying someone else’s mortgage while you save, the premium can be cheaper than another two years out of the market. If values are falling, waiting looks better, because your deposit is chasing a target that is coming toward you.
There is no general answer. It comes down to your numbers: what the premium actually costs over the loan term, what you are paying in rent meanwhile, and how confident you are about your income. A broker can run both versions for you, and the borrowing power calculator is a starting point.
Things people get wrong about LMI
- It does not protect you. If your home is sold at a loss after a default, you can still be pursued for the shortfall.
- It is not transferable. Refinance to another lender and you may pay it again.
- Partial refunds exist but are limited. Some insurers refund a portion if you cancel within the first year or two. Ask before you assume.
- It is not the only cost of a small deposit. Lenders also scrutinise higher-LVR applications more closely and sometimes price the rate higher.
FAQs
Who does LMI protect?
The lender. It covers their loss if you default and the property sells for less than the debt.
When do I have to pay it?
When your deposit is under 20% of the purchase price. Above that, it does not apply.
Can I pay it upfront instead of adding it to the loan?
Usually yes, and it is cheaper overall because you avoid paying interest on it for thirty years.
Do I pay LMI again if I refinance?
Possibly. It is not transferable between lenders, so refinancing while still above 80% can mean a fresh premium.
Can LMI be waived?
Yes — through a guarantor, an eligible government guarantee scheme, or a professional waiver offered by some lenders to certain occupations.
Is LMI refundable if I sell early?
Sometimes partially, if you cancel within the insurer’s refund window, which is typically the first year or two. Check the specific policy.
James Haywood
Financial Services Expert
James has worked with property investors since 2017, helping them scale portfolios on market data rather than guesswork — picking suburbs with room to grow, and structuring the loans around a long-term plan instead of the next purchase.
Through his Property Surfer Program, clients get their purchase structure set up before they buy, access to the market data behind the suburb calls, and automated loan repricing every three months so the rate does not quietly drift upward. Asset protection and risk sit inside the structure rather than being handled afterwards.
He works alongside a referral network across financial planning, accounting, conveyancing, family law and building inspections, so clients are not assembling a team of their own from scratch.