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. In the 12 months to June 2026, Felix Finance supported 154 families and settled over $115,000,000 in home loans, and we 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 varies based on the loan-to-value ratio (LVR), deposit size, loan size and lender, influencing overall financial planning.
- Borrowers may be able to access lower-cost alternatives to LMI, such as family guarantees, professional waivers, low deposit 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 generally not required because the loan to value ratio (LVR) is 80% or less.
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: Lenders 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 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.
LMI premiums vary by lender, LVR and loan size, and are typically anywhere from thousands to tens of thousands of dollars. A broker can compare them for you.
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.
5% Deposit Scheme and LMI
The Australian Government 5% Deposit Scheme (formerly the First Home Guarantee and Home Guarantee Scheme, renamed on 1 October 2025) is designed to help eligible home buyers enter the property market sooner by reducing the deposit required. Here’s how the scheme can impact LMI:
- Low Deposit Requirement: The scheme allows eligible first home buyers to purchase with a deposit as low as 5% (or 2% for eligible single parents and legal guardians), significantly lower than the typical 20% required to avoid LMI.
- Government Guarantee: Under the scheme, the government guarantees up to 15% of the property value, so no LMI is payable. This can save borrowers thousands of dollars in LMI premiums.
- Eligibility Criteria: To qualify, you must be an Australian citizen or permanent resident aged 18 or over, buying a home to live in, and be a first home buyer or not have owned property in Australia in the last 10 years. Since 1 October 2025 there are no income caps and no limit on the number of places. Check the full requirements at firsthomebuyers.gov.au.
- Applicable to New and Existing Homes: The scheme can be used to purchase both new and existing homes in any state or territory. Property price caps apply and vary by location (for example, $1,500,000 in Sydney and $950,000 in Melbourne). The postcode tool at firsthomebuyers.gov.au gives the exact cap for your area.
- Additional Fees: While the scheme can help avoid LMI, borrowers may still need to pay other fees, such as mortgage registration fees and stamp duty.
By using the 5% Deposit 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 minimise 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
Some lenders may waive LMI for certain professionals who 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
Some lenders charge a Low Deposit Premium (LDP) or Risk Fee instead of LMI when the loan is above 80% LVR. These are not insurance policies, and they are charged instead of LMI, not in addition to it. There are also specialist low-deposit options, such as Keystart in Western Australia (minimum 2% deposit and no LMI, although its rates are generally higher than mainstream lenders) and other lenders that specialise in smaller deposits.
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.
Last reviewed: September 2026.
This information is general only and does not take your personal objectives, financial situation or needs into account. Consider whether it is right for you before acting on it. Felix Finance Pty Ltd ABN 79 664 494 615 is a credit representative (572079) of Finsure Finance and Insurance Pty Ltd, Australian Credit Licence 384704.
