What LMI Is, And What It Is Not
LMI is often misunderstood. The name sounds like it should protect the borrower, but it is the opposite: LMI protects the lender against the risk that you default and the sale of the property does not cover the remaining loan balance. You pay the premium, but the policy pays out to the bank, not to you.
LMI is not the same as mortgage protection insurance. Mortgage protection insurance is a separate product that pays your loan repayments if you lose your job, become disabled or die. It is optional. LMI is mandatory above 80% LVR at almost every lender, regardless of whether you want it.
When You Pay LMI
LMI is triggered when your loan to value ratio (LVR) exceeds 80%. LVR is calculated as loan amount divided by property value. For example:
- Buying a $600,000 home with a $120,000 deposit = $480,000 loan = 80% LVR. No LMI.
- Buying a $600,000 home with a $60,000 deposit = $540,000 loan = 90% LVR. LMI applies.
- Buying a $600,000 home with a $30,000 deposit = $570,000 loan = 95% LVR. LMI applies, and it is expensive.
A few lender products and professional packages let you avoid LMI above 80% LVR, but the default rule at every major lender is: above 80%, LMI applies.
How Much LMI Costs
LMI premiums are calculated by the insurer (most commonly QBE LMI or Helia) based on loan amount and LVR. The table below shows rough estimates for owner occupier loans.
| Loan Amount | 85% LVR | 90% LVR | 95% LVR |
|---|---|---|---|
| $400,000 | $3,500 | $6,500 | $13,500 |
| $600,000 | $6,000 | $11,500 | $22,000 |
| $800,000 | $9,000 | $17,000 | $32,000 |
| $1,000,000 | $12,500 | $23,000 | $42,000 |
Estimates only. Actual premiums vary by lender, insurer, LVR to the dollar, and borrower profile. Investor loans typically attract higher premiums than owner occupier.
Notice the step change between 90% and 95% LVR. At 95% LVR the premium can roughly double compared to 90% LVR for the same loan size. This is why many borrowers aim to get to 90% if they cannot make 80%, rather than going all the way to 95%.
How To Avoid LMI
Six ways to avoid LMI, in rough order of how common they are.
- Save a 20% deposit. The most straightforward path. No LMI, more lender choice, lower interest rate. The downside is it takes longer. See our deposit guide for how much you actually need.
- First Home Guarantee (eligible first home buyers). 5% deposit, no LMI. The Australian Government guarantees the gap. Income caps ($125,000 single, $200,000 couple) and property price caps apply. Limited places per year.
- Family guarantor loan. A parent uses equity in their property as additional security. You can buy with as little as 0% deposit. The guarantor does not give you cash but takes on legal responsibility for part of the loan. See the guarantor guide.
- Professional packages. Doctors, dentists, pharmacists, vets, lawyers, accountants, mining engineers and some other professions can access LMI waived products up to 90 or 95% LVR at several lenders. If you qualify, this is the best way to buy sooner with a small deposit.
- Regional First Home Guarantee. A separate scheme for first home buyers in regional areas, also offering 5% deposit without LMI.
- First Home Super Saver Scheme. Release voluntary super contributions to boost your deposit. Does not avoid LMI directly but can help you reach 20%.
When LMI Is Actually Worth Paying
LMI gets a bad reputation but it is not always the wrong choice. Three scenarios where paying LMI makes financial sense:
- You are buying in a market that is rising faster than you can save. If Sydney or Melbourne prices are growing 8% a year and your deposit is growing 4% a year through saving, paying LMI now and getting into the market beats waiting two more years.
- You are an investor and the rental yield covers the LMI cost. If LMI is $10,000 and you amortise that over a 10 year hold, it is $1,000 a year. If the rental income covers that comfortably, LMI is cheap insurance against waiting.
- You are buying at 85 to 88% LVR rather than 95%. At lower LVRs the LMI premium is modest, often under $7,000 on a $500,000 loan. That is usually cheaper than another year of rent in a capital city.
LMI is harder to justify at 95% LVR on large loans, because the premium can exceed $30,000 and eats significantly into the benefit of buying sooner. In that range, explore the First Home Guarantee or a guarantor loan first.
See If You Need LMI
Your LVR, loan size and eligibility for schemes like the First Home Guarantee determine whether you pay LMI. Use Lendera's free comparison tool to see your options across 60+ lenders.
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