Understanding LMI and How to Avoid It: A Complete Guide
Learn what Lenders Mortgage Insurance (LMI) is, how much it costs at different LVRs, and practical strategies to avoid paying it when buying property in Australia.
Definition
Lenders Mortgage Insurance (LMI)
A one-off insurance premium that protects the lender (not the borrower) if the borrower defaults on their home loan and the property sale does not cover the outstanding debt. LMI is typically required when the deposit is less than 20% of the property value (i.e., the Loan-to-Value Ratio exceeds 80%).
Lenders Mortgage Insurance — commonly known as LMI — is one of the most significant upfront costs that catches Australian home buyers off guard. It can add thousands or even tens of thousands of dollars to your property purchase, yet many buyers do not fully understand what it is, why they are paying it, or how to avoid it. This guide breaks down everything you need to know about LMI, including real cost examples and practical strategies to reduce or eliminate it entirely.
What Is Lenders Mortgage Insurance?
LMI is a one-off insurance premium that protects the lender — not you — in the event that you default on your home loan and the sale of the property does not cover the outstanding debt. Despite being designed to protect the bank, it is the borrower who pays the premium.
LMI is typically required when your deposit is less than 20% of the property's value. In lending terms, this means your Loan-to-Value Ratio (LVR) is above 80%. The higher your LVR, the more risk the lender carries, and the more expensive the LMI premium becomes.
Above 80% LVR
LMI Trigger
Deposit less than 20%
$8,000-$35,000
Typical Cost Range
Depends on LVR and loan size
The Lender
Who It Protects
Not the borrower
Who Pays LMI and Why?
You will be required to pay LMI if your deposit is less than 20% of the purchase price. This applies to most first-home buyers and many upgraders who have not yet built substantial equity. The lender arranges the policy with an LMI provider (such as Helia or QBE), and the cost is passed directly to you.
The reasoning is straightforward: a smaller deposit means the lender has less of a buffer if property values fall. LMI allows lenders to approve loans they would otherwise consider too risky, which means it can actually help you get into the market sooner — but at a cost.
How Much Does LMI Cost?
LMI premiums vary based on three factors: the size of your loan, the LVR, and the LMI provider. Below is a general guide for a $600,000 property to illustrate how dramatically costs increase as your deposit decreases:
| Deposit | LVR | Loan Amount | Estimated LMI |
|---|---|---|---|
| 20% ($120,000) | 80% | $480,000 | $0 (no LMI required) |
| 15% ($90,000) | 85% | $510,000 | ~$8,000 |
| 10% ($60,000) | 90% | $540,000 | ~$16,000 |
| 5% ($30,000) | 95% | $570,000 | ~$28,000 |
As you can see, the difference between a 10% and 5% deposit is not just $30,000 in savings — it also means roughly $12,000 more in LMI. These figures are estimates and will vary between lenders and LMI providers, but they illustrate the steep cost curve as LVR increases.
LMI Costs Escalate Steeply
The jump from a 10% deposit (~$16,000 LMI) to a 5% deposit (~$28,000 LMI) adds roughly $12,000 in LMI alone — on top of the $30,000 difference in deposit. Every extra percentage point of deposit you save can dramatically reduce your LMI bill.
Can You Add LMI to Your Loan?
Yes. Most lenders allow you to capitalise (add) the LMI premium onto your home loan rather than paying it upfront. While this removes the immediate cash outlay, it means you are borrowing more and paying interest on the LMI amount for the entire life of the loan. On a 30-year mortgage at 6%, capitalising a $16,000 LMI premium would cost you approximately $34,500 in total (the original $16,000 plus around $18,500 in interest). So while capitalising LMI preserves your cash, it is the most expensive way to pay it.
$16,000
Capitalised LMI Example
Added to the loan
~$34,500
Total Cost Over 30 Years
Including $18,500 in interest
Strategies to Avoid LMI
There are several legitimate strategies to avoid paying LMI entirely or to significantly reduce the premium:
- 1
Save a 20% Deposit
The most straightforward approach. With a 20% deposit, your LVR is 80% and no LMI is required. For a $600,000 property, you need $120,000.
- 2
Family Guarantee (Guarantor Loan)
A family member uses equity in their own property as additional security. You can often borrow up to 100% of the property value without paying any LMI.
- 3
Government First Home Buyer Schemes
The Home Guarantee Scheme lets eligible first-home buyers purchase with as little as 5% deposit without LMI. The government guarantees the gap between your deposit and 20%.
- 4
Professional Packages (LMI Waivers)
Some lenders offer LMI waivers for doctors, dentists, lawyers, accountants, and engineers — allowing up to 85-90% LVR without LMI.
- 5
Restructure Your Purchase
If you are close to 20%, consider a slightly lower-priced property that brings your LVR to 80%, then use an offset account for additional savings.
1. Save a 20% Deposit
The most straightforward approach. With a 20% deposit, your LVR is 80% and no LMI is required. For a $600,000 property, you would need $120,000. While this takes longer to save, it eliminates the LMI cost completely and also results in lower monthly repayments. For strategies on saving your deposit, see our First Home Buyer's Guide.
2. Family Guarantee (Guarantor Loan)
A family member — usually a parent — can use equity in their own property as additional security for your loan. This effectively gives the lender the security of a larger deposit without you needing to save it yourself. With a guarantor, you can often borrow up to 100% of the property value (or even 100% plus costs) without paying any LMI.
The guarantee is typically limited to a specific amount and can be released once you have built sufficient equity (usually once your LVR drops below 80%). This is one of the most effective ways for first-home buyers to avoid LMI while entering the market sooner.
3. Government First Home Buyer Schemes
The Australian Government's Home Guarantee Scheme allows eligible first-home buyers to purchase with as little as a 5% deposit without paying LMI. The government guarantees the difference between your deposit and 20%, removing the lender's need for LMI. Key programs include:
- First Home Guarantee: Purchase with a 5% deposit, no LMI, subject to property price caps by region
- Regional First Home Buyer Guarantee: Similar scheme for buyers purchasing in regional areas
- Family Home Guarantee: For single parents with dependants, purchase with a 2% deposit
Places are limited each financial year, and eligibility criteria apply including income caps and property price thresholds. Check the National Housing Finance and Investment Corporation (NHFIC) website for current details.
Government Guarantee Schemes
The Home Guarantee Scheme can save you $10,000-$30,000 in LMI by letting you buy with a 5% deposit. Places are limited each financial year, so apply early. Check eligibility and property price caps at the NHFIC website.
4. Professional Packages (LMI Waivers)
Some lenders offer LMI waivers for borrowers in specific professions — typically medical doctors, dentists, lawyers, accountants, engineers, and other high-income professionals. These waivers allow you to borrow up to 85% or even 90% LVR without paying LMI, based on the assumption that your income trajectory makes you a lower-risk borrower.
Not all lenders offer professional packages, and the eligible professions vary. Ask your mortgage broker specifically about LMI waiver options for your occupation.
5. Smaller Loan Combined with an Offset Account
If you are close to the 20% threshold, consider whether you can restructure your purchase to avoid LMI. For example, you might purchase a slightly lower-priced property that brings your LVR to 80%, then use an offset account to park additional savings. The offset reduces your interest costs while keeping your funds accessible. For a detailed explanation of offset accounts and loan structures, see our Home Loan and Finance Guide.
When Paying LMI Actually Makes Sense
Despite the significant cost, there are scenarios where paying LMI is a sound financial decision:
- Rapidly rising market: If property prices in your target area are increasing by 5-10% per year, the cost of waiting another 1-2 years to save a 20% deposit could exceed the LMI premium. On a $600,000 property growing at 7% per year, that is $42,000 in price growth in one year — far more than even the highest LMI premium.
- Rent versus buy calculation: If the rent you are paying while saving a larger deposit exceeds the cost of LMI spread over your expected ownership period, buying sooner with LMI can be more economical.
- Personal circumstances: If you need housing stability (growing family, job relocation) and waiting to save more is not practical, paying LMI to buy now may be the right choice.
The key is to run the numbers for your specific situation. Compare the total cost of buying now with LMI versus the total cost of waiting to save a larger deposit, factoring in rent, projected price growth, and your personal circumstances.
LMI Is Not Refundable
Once paid, LMI is generally non-refundable and non-transferable. If you refinance to a different lender within a few years and your LVR is still above 80%, you may need to pay LMI again with the new lender. Some LMI providers offer partial refunds if you refinance within the first year or two, but this varies and should not be relied upon. Always factor this into your refinancing calculations.
LMI Is Non-Refundable
If you refinance to a different lender and your LVR is still above 80%, you may need to pay LMI again. Factor this into any refinancing decision — it can wipe out the savings from a lower interest rate.
Related Resources
- Home Loan and Finance Guide — Complete guide to home loan types, offset accounts, and getting approved
- First Home Buyer's Guide — Step-by-step guide to buying your first home including deposit strategies
- Hidden Costs of Buying Property — Full breakdown of additional costs beyond the purchase price
LMI is a significant cost that protects the lender at the borrower's expense, but it is not always avoidable — and not always worth avoiding. If you can save a 20% deposit, use a guarantor, or access a government scheme, you should absolutely avoid paying LMI. But if waiting to save more means missing out on a property in a rising market or paying years of additional rent, the maths may favour buying sooner and wearing the LMI cost. Either way, understanding exactly what LMI is and what it costs puts you in control of the decision.
This article is for general information only and does not constitute financial advice. LMI premiums vary between lenders and providers. Always obtain a specific LMI quote from your lender and consult a qualified mortgage broker before making decisions about your home loan.
Analyze Contracts with AI
Realestate Lens identifies risks, hidden costs, and red flags in any Australian property contract — in about 60 seconds.
Get Started Free