Key takeaways
- LMI protects the lender, not you or your guarantor, even though you usually pay for it.
- It usually applies when you borrow more than 80% of the property’s value.
- The premium depends on the lender, the loan amount and your deposit. You pay it at settlement or add it to the loan.
- Eligible first home buyers can avoid LMI with a 5% deposit under the Australian Government 5% Deposit Scheme; eligible single parents with 2%.
- A family guarantee or a lender’s LMI waiver for certain professions can also avoid it.
Lenders mortgage insurance (LMI) is a one-off cost most lenders charge when you borrow more than 80% of a property’s value. It lets you buy with a smaller deposit, but it protects the lender, not you. Here’s when LMI applies, what drives the cost, and how to reduce or avoid it.
What is lenders mortgage insurance?
LMI is insurance your lender takes out against the risk that you can’t repay the loan and the property sells for less than you owe. The lender usually passes the cost on to you, but only the lender can claim. It doesn’t cover you or any guarantor.
It isn’t mortgage protection insurance either. That’s a separate product some borrowers buy for themselves in case they can’t make repayments.
Example: what happens on a shortfall
For example, a borrower who has defaulted still owes $390,000 when the home is sold for $300,000. The $90,000 shortfall doesn’t disappear. The LMI insurer pays the lender, then can ask the borrower to repay the $90,000 directly. LMI insurers have hardship policies for people in that position.
When you pay LMI: the 80% rule
Lenders measure your loan against the property’s value as the loan-to-value ratio (LVR). Moneysmart’s example: borrow $450,000 to buy a $600,000 home and your LVR is 75%. Above 80%, you’ll usually pay LMI.
- LVR
- Loan ÷ property value × 100
- LMI usually applies
- When the LVR is above 80%
- Deposit to avoid it
- 20% of the value, plus buying costs
- When it’s paid
- At settlement, or added to the loan
Example: working out your LVR
For example, you buy an $800,000 home with an $80,000 deposit and borrow $720,000. Your LVR is 90%, so LMI would usually apply. To reach 80% you’d need a $160,000 deposit, or a government scheme or family guarantee to cover the $80,000 gap. Buying costs such as transfer duty come on top.
The lender uses its own valuation. If it values the home below what you’re paying, your LVR is higher than you expected and LMI can apply even with a 20% deposit.
How much does LMI cost?
There’s no standard price. The Insurance Council of Australia says the premium depends on the lender, how much it lends to you and the size of your deposit. So a bigger loan and a smaller deposit mean a bigger premium.
It’s a single premium that covers the lender for the life of the loan. You can pay it at settlement, or you may be able to add it to the loan, which means paying interest on it over the loan term.
Close to a 20% deposit?
Phillip can check whether a scheme, a guarantor or a small change to your deposit could remove LMI altogether.
Five ways to reduce or avoid LMI
Save a 20% deposit
Moneysmart suggests aiming for 20% of the price plus enough for buying costs. The trade-off is time: the longer you save, the longer you wait to buy.
Use the Australian Government 5% Deposit Scheme
Eligible first home buyers can buy with a 5% deposit and no LMI, because the Government guarantees up to 15% of the property’s value to the lender. Since 1 October 2025 there are no income caps or limits on places. The NSW price cap is $1.5 million in Sydney and the regional centres and $800,000 elsewhere. Read our First Home Guarantee guide.
Single parents: buy with 2%
Single parents and single legal guardians of a dependent child can buy with a 2% deposit and no LMI, even if they’ve owned before, as long as they won’t own other property once the new home settles.
Ask family for a guarantee
A relative’s property secures part of your loan, often the gap between your deposit and 20%, so the lender can treat the loan as if you had a 20% deposit. The guarantor takes on real risk. See our guide to family financing options.
Check for a professional LMI waiver
Some lenders waive LMI for certain professions, such as eligible medical, legal and finance professionals, up to set LVR limits. Criteria differ between lenders and change often.
Shared equity is another route. Under Help to Buy the Government contributes part of the price, which removes the need for LMI, but income limits and other conditions apply. Our overview of financial assistance for first home buyers compares the options, and our first home buyer page explains how we help.
Is paying LMI ever worth it?
Sometimes. LMI is the price of buying sooner with a smaller deposit. If you’re paying rent while you save, or prices rise faster than your savings, waiting has a cost too. On the other hand, LMI adds to your costs and you start with less equity, so a fall in value hits harder.
Weigh the premium against how long it would take to save the gap, and make sure repayments stay comfortable if rates rise. Moneysmart suggests checking what your costs would be if rates went up by 3%. Try it in our home loan repayments calculator.
LMI when you refinance or top up
LMI covers the lender that took it out. If you refinance to a new lender, or increase your loan, while you owe more than 80% of the property’s value, you may pay LMI again.
Before you refinance, check your LVR against a current valuation. If the home has grown in value or you’ve paid the loan down, you may be under 80%. And if your loan is under the 5% Deposit Scheme, moving it to a lender that isn’t a participating lender means losing the Scheme’s benefit.
Frequently asked questions
No. LMI protects the lender. If you default and the sale of the property doesn’t cover the loan, the insurer pays the lender and can then recover the shortfall from you. Cover for yourself is a different product, such as mortgage protection insurance. LMI insurers do have hardship policies if you’re struggling.
LMI usually applies when you borrow more than 80% of the property’s value, which means a deposit of less than 20%. The loan-to-value ratio uses the lender’s valuation, so a valuation below the price can push you over 80% even when your deposit is 20% of what you’re paying.
Often, yes. Lenders can let you add the premium to the loan instead of paying it at settlement. That keeps more cash in your pocket, but you pay interest on the premium for the life of the loan and your loan balance starts higher. Ask the lender how its limits treat the added premium.
Yes, if you’re eligible for the Australian Government 5% Deposit Scheme. The Government guarantees part of the loan to the lender, so you don’t pay LMI. You must be a first home buyer, or not have owned property in Australia in the last 10 years, buy under the price cap and live in the home.
You might. LMI covers the lender that took it out and doesn’t move with you. If you refinance to a new lender while your loan is more than 80% of the property’s value, the new lender may charge LMI again. Get a current valuation first; growth in value or your repayments may have brought you under 80%.
Sources
- Moneysmart: Lenders mortgage insurance (LMI) (opens in a new tab)
- Moneysmart: Save for a house deposit (opens in a new tab)
- Insurance Council of Australia: Lenders Mortgage Insurance (opens in a new tab)
- Housing Australia: 5% Deposit Scheme for first home buyers (opens in a new tab)
- Housing Australia: 5% Deposit Scheme Information Guide (opens in a new tab)
- Housing Australia: 5% Deposit Scheme for single parents and legal guardians (opens in a new tab)
This article is general information only and doesn't take your objectives, financial situation or needs into account. Figures and eligibility rules change; check the official sources above or talk to us before you act. Keystone Home Loans Pty Ltd ATF BEMA Family Trust, Credit Representative Number 564704 is authorised under Australian Credit Licence Number 384704.
Written by
Phillip Bui
Founder and Principal Mortgage Broker at Keystone Home Loans, based in Arncliffe, NSW. Accredited Mortgage Broker and Full Member of the Mortgage & Finance Association of Australia (MFAA).
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