LMI (Lenders Mortgage Insurance) – What It Is and How to Avoid It

Understanding Lenders Mortgage Insurance

Lenders Mortgage Insurance (LMI) is a one-off fee that protects your lender, not you.
It’s charged when your deposit is less than 20% of the property’s purchase price.
While it helps first home buyers get into the market sooner, it can add thousands to your total loan cost.
Let’s unpack how it works and how to avoid it where possible.

1️⃣ Why LMI Exists

From a lender’s perspective, low-deposit loans are riskier.
If a borrower defaults, there’s a higher chance the property sale won’t cover the remaining loan balance.
LMI is designed to protect the lender from that potential shortfall.

For first home buyers, this means you can often buy with just a 5–10% deposit —
but you’ll pay an LMI premium to do so.

2️⃣ How LMI Is Calculated

LMI isn’t a flat rate — it’s based on the loan-to-value ratio (LVR) and the amount you borrow.
The higher the LVR, the higher the premium. Most lenders use insurers like Genworth or Helia (formerly QBE LMI) to calculate it.

Example:

• Property price: $700,000
• Deposit: $35,000 (5%)
• Loan amount: $665,000
• Estimated LMI: $27,000–$30,000

That $30,000 isn’t paid upfront; it’s usually added to your loan and repaid over time with interest.

3️⃣ When You’ll Need to Pay LMI

You’ll pay LMI if your deposit is less than 20% and you don’t qualify for a government guarantee scheme.
LMI usually applies when your LVR exceeds 80%.
For example:

• 90% LVR = 10% deposit → LMI applies
• 85% LVR = 15% deposit → LMI applies (smaller premium)
• 80% LVR = 20% deposit → No LMI

4️⃣ How to Avoid or Reduce LMI

Here are proven ways to skip or minimise LMI:

• Save a 20% deposit: the classic route, no insurance needed.
• Use a guarantor loan: a family member offers property equity as security — no LMI, no cash gift required.
• Apply under the First Home Guarantee (FHBG): buy with a 5% deposit and no LMI thanks to the government guarantee.
• Choose lenders offering LMI discounts: some banks waive or reduce LMI for professionals or specific loan products.
• Buy at a lower price point: smaller loan = smaller LMI premium.

5️⃣ LMI vs. Loan Protection Insurance (Don’t Confuse Them)

LMI protects the lender — not you.
Loan Protection Insurance, on the other hand, is optional and protects you if you lose income due to illness, injury, or redundancy.
It’s easy to mix these up, but they serve completely different purposes.

6️⃣ Pros & Cons of Paying LMI

7️⃣ What Happens If You Refinance

If you refinance before your LVR drops below 80%, you’ll pay LMI again on the new loan —
even if you already paid it once. To avoid this, wait until your equity grows past 20% before switching lenders.

Related post: Understanding Home Loan Types

8️⃣ Government Schemes That Remove LMI

The following programs completely remove the need for LMI by guaranteeing part of your loan:

• First Home Guarantee (FHBG) – 5% deposit, no LMI.
• Regional First Home Buyer Guarantee – For buyers outside metro areas.
• Family Home Guarantee – For single parents buying with 2% deposit.

Related post: Government Grants & Schemes Explained

9️⃣ Common LMI Myths

• Myth: “LMI protects me if I can’t repay.”Reality: It protects the lender — not you.
• Myth: “I can claim LMI on tax.”Reality: Only if the property is an investment, not your primary home.
• Myth: “I can get my LMI refunded if I sell.”Reality: LMI is non-refundable once charged.

🔟 Real Examples – How LMI Impacts Buyers

These figures vary by insurer and state, but they highlight why even a slightly larger deposit can make a big difference.

Next Steps – Smarter Ways to Avoid LMI

LMI doesn’t have to be a dealbreaker. With the right planning, you can either reduce it or avoid it entirely.
Start by understanding your loan options, checking grant eligibility, and comparing lenders who cater specifically to first home buyers.