If you’re buying with a smaller deposit, you’ll hear about Lenders Mortgage Insurance, or LMI. It’s one of the most misunderstood costs in home buying.
What LMI is
LMI is insurance that protects the lender, not you, if you can’t repay the loan and the sale of the property doesn’t cover what’s owed. You pay the premium, but the lender is the one insured.
It’s different from mortgage protection or income protection insurance, which are designed to protect you.
When it applies
Lenders generally charge LMI when you borrow more than 80% of the property’s value. In other words, when your deposit is less than 20%.
How much it costs
The premium depends on the size of the loan and how small the deposit is. The smaller the deposit, the higher the premium. It can run into many thousands of dollars.
Most lenders let you add LMI to the loan instead of paying it upfront. That saves cash now, but you then pay interest on it.
Ways buyers reduce or avoid LMI
- Save a 20% deposit. The simplest way, though it can take time.
- Government schemes. Eligible first home buyers may be able to buy with a small deposit and no LMI under the Australian Government 5% Deposit Scheme. See our first home buyers page.
- A family guarantee. Some lenders let a family member use equity in their own home as extra security. This is a serious commitment for the guarantor, who should get independent legal advice.
- Profession-based waivers. Some lenders waive LMI for certain professions at higher loan-to-value ratios.
Is paying LMI ever worth it?
Sometimes. Paying LMI can let you buy sooner instead of spending more years saving while paying rent. Whether that makes sense depends on your situation, the cost of the premium and your plans.
Let’s work out your options
We can estimate what LMI might cost for your purchase and check which alternatives you may be eligible for. Book a free 15-minute chat.
This article is general information only and doesn’t take your personal circumstances into account.