The insurance you pay for, but never collect on
When your deposit falls short of 20%, your lender asks you to buy lenders mortgage insurance — then keeps the payout for themselves. It is a one-off premium that can range from $8,000 to $35,000 depending on your loan-to-value ratio and loan size, and it protects the bank if you default, not you. Understanding how LMI is calculated, when it kicks in, and how you can avoid it is the difference between buying sooner on informed terms and buying into a bill you did not expect.
- On a $600,000 property with a 5% deposit, the LMI premium alone can exceed $30,000 .
- Capitalise that premium into your loan and the true 30-year cost climbs above $60,000 .
- Only 15% of first home buyers believe they could save a full 20% deposit .
Property prices have outpaced wages for years, so waiting to save a 20% deposit means chasing a moving target. That is why so many buyers now accept LMI as the price of getting in — but accepting it and understanding it are very different things.
LMI protects the lender, not you
Lenders mortgage insurance protects your lender if you default on your home loan and the sale of the property does not cover the outstanding debt. It does not protect you. ASIC MoneySmart is clear on this point: LMI does not benefit the borrower, it only protects the lender .
You pay LMI when your loan-to-value ratio exceeds 80% — meaning your deposit is less than 20% of the property value. Most lenders require it at any LVR above 80%, and the cost rises steeply as your LVR climbs higher .
How the cost is calculated
LMI premiums depend on two things: your LVR and the size of your loan. The higher both numbers are, the more you pay. Premiums are set by the mortgage insurer — mainly Helia, QBE, and Arch in Australia — and each lender uses one or more of these providers .
Here is what LMI looks like at different deposit sizes on a $600,000 property for an owner-occupier paying principal and interest:
Deposit | Deposit amount | Loan amount | LVR | Estimated LMI |
|---|---|---|---|---|
5% | $30,000 | $570,000 | 95% | $25,000 – $35,000 |
10% | $60,000 | $540,000 | 90% | $9,000 – $14,000 |
15% | $90,000 | $510,000 | 85% | $4,000 – $6,000 |
20% | $120,000 | $480,000 | 80% | $0 |
These are estimates. Actual premiums vary between lenders and insurers . Investment property loans attract 10% to 20% higher LMI premiums than owner-occupier loans .
The jump between a 10% deposit and a 5% deposit is where LMI costs escalate fastest. Going from 90% to 95% LVR roughly doubles or triples the premium. That single 5% difference in deposit can mean an extra $15,000 to $20,000 in LMI.
The convenience of capitalising is not free
Most borrowers capitalise LMI — meaning the premium is added to the loan balance at settlement. You do not pay it upfront out of pocket. CommBank confirms this is standard practice: the LMI premium is capitalised and added to the total home loan amount when the loan is settled .
This sounds convenient. You do not need extra cash on settlement day. But it has a cost you need to understand. When you capitalise a $25,000 LMI premium at 6% interest over 30 years, you pay roughly $29,000 in interest on top of the original premium — bringing the true cost to around $54,000 . The premium itself is a one-off charge, but the interest compounds for decades.
LMI is not refundable in most cases
LMI covers the lender for the life of the loan, and you generally cannot get it back. If you sell the property or refinance to another lender, the policy does not transfer. Some lenders offer a partial refund — typically 40% if you repay the loan within 12 months, or 20% within 24 months — but beyond that, the premium is gone .
You also cannot transfer an LMI policy to a new lender when refinancing. If your LVR is still above 80% when you refinance, you may need to pay LMI again .
When LMI actually makes sense
LMI is not inherently bad. It is a cost, and like any cost, the question is whether the benefit outweighs the price.
If property prices in your target area are rising at 5% to 7% a year, waiting two more years to save a 20% deposit could mean the property you want costs $60,000 to $80,000 more. In that scenario, paying $15,000 in LMI to buy now could leave you ahead financially.
The trade-off is real: pay LMI and buy sooner with a smaller deposit, or save longer and avoid LMI but face higher property prices. There is no universally right answer. It depends on your local market, your savings rate, and your financial buffer after settlement.
Ways to avoid or reduce LMI
You have several options beyond saving a 20% deposit:
- Government guarantee schemes. Programs like the First Home Guarantee allow eligible buyers to buy with as little as a 5% deposit without paying LMI. The government guarantees the difference between your deposit and 20%. These schemes are covered in detail in Step 4 of this lesson.
- Family guarantees. A parent or family member can use equity in their property to guarantee part of your loan, bringing your effective LVR to 80% or below. This is covered in Step 3.
- Professional LMI waivers. Some lenders waive LMI for borrowers in certain professions — typically doctors, dentists, lawyers, accountants, and engineers. Eligibility usually requires registration with your professional body and a minimum income of $90,000 to $150,000 depending on the lender and profession .
- A larger deposit. Even if you cannot reach 20%, moving from a 5% deposit to a 10% deposit can cut your LMI by $15,000 or more. Every percentage point of deposit reduces the premium.