Planning to buy a home without a 20% deposit? You may be considering a loan with lender’s mortgage insurance (LMI). This lender’s mortgage insurance guide will help you understand what LMI is, if it’s necessary, how much it costs, and alternatives you can consider.
To confirm if you need to pay LMI and if so how much, give the team at Felix Finance a call. We've helped hundreds of families get onto the property ladder with a low-deposit loan option and can talk you through your personalised options.
Key takeaways:
- Lender’s mortgage insurance (LMI) was historically mandated for loans with less than a 20% deposit, primarily protecting lenders against borrower default.
- The cost of LMI can range from 1-5% of the loan amount and varies based on the loan-to-value ratio (LVR) and deposit size, influencing overall financial planning.
- Borrowers may be able to access lower-cost alternatives to LMI, such as family guarantees, professional waivers, deposit boost loans or Government Schemes to reduce or eliminate associated costs
Understanding lender's mortgage insurance
Lenders mortgage insurance (LMI) protects lenders against financial losses if a borrower defaults on a home loan and the property is sold at a loss. It ensures that lenders can recover their losses if the borrower fails to meet their loan obligations, but it is not for the borrower’s benefit. Lenders mortgage insurance LMI is an important aspect of this protection, and claims can be made by only the lender.
While mortgage protection insurance (MPI) provides financial support to borrowers during unexpected life events, LMI strictly protects the lender’s financial interests.
What is LMI?
Lender’s mortgage insurance (LMI) is required by some lenders when the deposit or equity is less than 20% of the property’s value. It allows borrowers to obtain mortgage finance without a substantial deposit, facilitating home ownership even with lower savings.
If a borrower has a 20% deposit, LMI is never required because the loan to value ratio (LVR) is below 80%.
Who does LMI protect?
Though paid for by the borrower, LMI is solely designed to protect the lender from financial losses due to borrower default. Many borrowers mistakenly believe that LMI offers them protection.
In reality, it is the lender’s financial interests that are safeguarded, not the borrower’s. If a borrower defaults, the property may be sold to cover the outstanding loan balance, but any shortfall must still be repaid by the borrower.
When do you need Lender's Mortgage Insurance?
Lender’s mortgage insurance (LMI) is often necessary when the borrower’s deposit is less than 20% of the property’s value, indicating higher risk for lenders. LMI protects lenders in case borrowers fail to make their loan payments. If the loan-to-value ratio (LVR) exceeds 80%, LMI will be required by most lenders.
While, saving a larger deposit can help borrowers avoid LMI costs, it may also be impractical—as rising house prices may mean the longer you save, the more expensive the home is.
Loan to Value Ratio (LVR) explained
The Loan-to-Value Ratio (LVR) is calculated by dividing the loan amount by the property’s appraised value. An LVR above 80% typically requires LMI as it signals higher risk for lenders.
Borrowers can reduce their LVR by having a guarantor, which might help avoid LMI.
Deposit requirements
LMI is generally required when a deposit is below 20% of the property’s value. Meeting the 20% deposit threshold helps borrowers avoid LMI, making it a crucial savings goal for potential homebuyers.
LMI eligibility criteria
Understanding the eligibility criteria for lender’s mortgage insurance (LMI) is crucial for borrowers looking to secure a home loan with a lower deposit. Here are the key factors that determine LMI eligibility:
- Loan-to-Value Ratio (LVR): Borrowers with an LVR above 80% are typically required to pay LMI. This means if your deposit is less than 20% of the purchase price, LMI will likely be necessary.
- Deposit Size: If your deposit is less than 20% of the property’s purchase price, you may be eligible for LMI. This is common for home loans with high LVRs, such as 90% or 95%.
- Credit Score Requirements: Some lenders may have additional criteria, such as minimum credit score requirements, to qualify for LMI.
- Income Thresholds: Lender's rarely consider income as part of an eligibility assessment.
- Lender-Specific Criteria: Each lender may have unique requirements, so it’s essential to check with your lender to understand their specific LMI eligibility criteria.
By meeting these criteria, borrowers can better navigate the requirements for LMI and plan their home loan accordingly.
How much does lender's mortgage insurance cost?
Lender’s mortgage insurance (LMI) is not a fixed fee. Understanding these costs is essential for planning your finances effectively.
Factors affecting LMI Costs
The cost of LMI can range from 1-5% of the home loan amount. The cost is influenced by the loan-to-value ratio (LVR), the value of the home, the state you're buying in, whether you're paying LMI upfront or capitalising it into your loan and which lender you choose.
LMI premiums are calculated on a tiered scale based on these variables and can vary by lender.
Lender's mortgage insurance costs 2025
Below are the live LMI rates on a range of home values, LVR and across the major lenders in Australia as of March 2025. Rates may have changed, or they may differ based on an individual's circumstances or a lender's policy so it's best to check with your mortgage broker for accurate rate information.
The table included lenders who charge LMI and lenders who charge a Low Deposit Premium (LDP) or a Risk Fee instead of LMI. LDPs or Risk Fees are not an insurance policy, but they are charged where the loan is above 80% LVR and in stead of LMI (not in addition to).
All of the below examples assume that the cost of the LMI, LDP or Risk Fee is capitalised into the loan (meaning it is not paid upfront).
These examples illustrate how LMI costs can vary significantly based on different loan scenarios.
LMI cost on a $650,000 home at 90% LVR
Figures taken from Quickli, March 2025.
LMI cost on a $800,000 home at 95% LVR
LMI cost on a $1,000,000 home at 90% LVR
LMI cost on a $1,300,000 home at 90% LVR
Paying for Lender's Mortgage Insurance
Borrowers can pay for lender’s mortgage insurance (LMI) either as a one-time upfront payment or by incorporating the cost into the overall loan (often called 'capitalising LMI').
Understanding these options can help manage your financial planning better.
Upfront Payment vs. Adding to Loan
Paying LMI upfront generally results in lower overall costs by avoiding interest on the premium over the life of the loan, especially if you choose to pay lmi.
However, incorporating LMI into the loan spreads the cost over time but leads to additional interest charges and higher total payments.
Impact on Loan Balance
Adding LMI to the loan increases the overall loan balance, leading to higher monthly home loan repayments and more interest over the life of the loan. This can significantly impact long-term financial obligations and should be carefully considered.
Home Guarantee Scheme and LMI
The Home Guarantee Scheme (HGS) is a government initiative designed to help eligible home buyers enter the property market sooner by reducing the deposit required. Here’s how HGS can impact LMI:
- Low Deposit Requirement: HGS allows eligible home buyers to purchase a home with a deposit as low as 2-5%, significantly lower than the typical 20% required to avoid LMI.
- Government Guarantee: Under HGS, the government guarantees the remaining loan amount, eliminating the need for LMI. This can save borrowers thousands of dollars in LMI premiums.
- Eligibility Criteria: To qualify for HGS, borrowers must meet specific criteria, such as being a first-home buyer or a single parent. It’s important to check the detailed eligibility requirements to see if you qualify.
- Applicable to New and Existing Homes: HGS can be used to purchase both new and existing homes, providing flexibility for borrowers in any state or territory.
- Additional Fees: While HGS can help avoid LMI, borrowers may still need to pay other fees, such as mortgage registration fees and stamp duty.
By leveraging the Home Guarantee Scheme, eligible borrowers can reduce their upfront costs and avoid paying LMI, making home ownership more accessible.
Refinancing and Lender's Mortgage Insurance
Refinancing a mortgage may require lender’s mortgage insurance (LMI) if the homeowner’s equity is insufficient. However, strategic refinancing can help minimize or avoid these costs.
LMI During Refinancing
LMI is typically required during refinancing if the loan-to-value ratio (LVR) exceeds 80%, indicating insufficient equity. This is a cost to be aware of if you're considering switching lenders.
Reducing LMI Costs with Refinancing
Borrowers can reduce LMI expenses by refinancing with the same lender or increasing their equity through larger down payments or property value appreciation. This approach can alleviate the financial burden of LMI.
Alternatives to Lender's Mortgage Insurance
Borrowers who wish to avoid paying LMI have several alternatives.
These include family guarantees and professional LMI waivers.
Family Guarantee
A family guarantee allows a family member to use their home equity to support a borrower’s home loan, potentially eliminating the need for LMI. This can cover the property price and associated costs like stamp duty and legal fees.
Professional LMI Waivers
Certain professionals may waive LMI if they meet specific income and employment benchmarks set by lenders. This can significantly reduce the financial burden of obtaining a home loan.
Low Deposit Premiums or Risk Fees
There are new lenders who specialise in low-deposit home loans (such as KeyStart or OwnHome) who offer alternatives to LMI.
LMI Versus Mortgage Protection Insurance
Understanding the difference between lender’s mortgage insurance (LMI) and mortgage protection insurance (MPI) is crucial for making informed decisions.
LMI is designed to protect the lender. On the other hand, MPI is there to safeguard borrowers.
Protecting the Lender vs. Protecting the Borrower
LMI protects lenders against losses from borrower defaults, whereas MPI provides coverage to borrowers in cases of unforeseen events like job loss or disability by helping cover mortgage repayments.
Choosing between these insurances depends on individual risk factors and needs.
Choosing the Right Insurance
Assessing financial situations and risk factors is essential when deciding between LMI and MPI.
Summary
In summary, understanding and managing lender’s mortgage insurance (LMI) is crucial for navigating the home loan landscape, especially if you're a first home buyer. By considering alternatives, making informed financial decisions, and proactively seeking assistance when needed, borrowers can optimise their mortgage experience and potentially save significant costs.
