Lenders mortgage insurance (LMI) is an insurance premium some borrowers pay when their deposit is below the level a lender requires. It protects the lender if the loan cannot be repaid, and it gives you no cover as the borrower. You may be able to avoid LMI with a bigger deposit or a family guarantee, depending on the lender.
One of the first questions we hear from home buyers in Camp Hill and Coorparoo is “what is lenders mortgage insurance (LMI), and why is it on my loan estimate?” A smaller deposit means more risk for the lender, and this insurance is how lenders cover that risk. For buyers with a smaller deposit, it can decide how soon they are able to buy.
What is LMI and who does it protect?
LMI is insurance that protects the lender if a borrower with a smaller deposit cannot repay their home loan. You pay for it, and the lender is the one covered.
The borrower gets no direct protection from the policy. It does nothing to help you meet your repayments if you lose your job or fall ill, and it does not cover your home or belongings. Its purpose is to let the lender recover its money if the property has to be sold and the sale does not cover the debt.
Depending on the lender, the premium may be paid upfront or added to your loan amount. Adding it to the loan means you pay interest on it over time, so the true cost ends up higher than the premium itself.
When do you have to pay lenders mortgage insurance?
You usually pay lenders mortgage insurance when your deposit is below 20% of the property’s value. Deposit requirements vary by lender, property, loan size and your circumstances, so the exact point differs from one application to the next.
Lenders measure this using your loan to value ratio, or LVR. That is the loan amount as a percentage of the property’s value. A higher LVR means a smaller deposit, and a smaller deposit means more risk for the lender.
The value used is the lender’s valuation. When the valuation comes in below the price you agreed to pay, your LVR rises, and LMI can apply even when your deposit looked big enough based on the contract price.
Refinancing can trigger it too. Moving lenders with equity below the new lender’s required level may mean paying LMI again, even if you paid it on your original loan.
Understanding LMI before you buy
Understanding LMI early helps you decide how much to save and when to buy. The cost is generally higher when your deposit is smaller and your loan is larger, and each lender works with its own insurer and pricing.
The premium also affects your borrowing plan. Once it is added to the loan, your loan amount and repayments both rise, and the lender includes that when it assesses what you can afford.
Our principal broker, George Pain, has worked on both the bank and broker side, which gives our team a practical understanding of how lender policy differs on smaller deposits.
How we work out if LMI applies to you
- Confirm your deposit, after setting aside money for Queensland transfer duty (stamp duty) and other purchase costs.
- Estimate a realistic purchase price for the suburbs you are looking in.
- Calculate your likely LVR at that price.
- Check lender policies for your income type and deposit source.
- Compare the cost of paying LMI now with the cost of waiting and saving more.
Our mortgage brokers in Camp Hill run these numbers with you before you make an offer, so LMI is a known figure from the start.
Can you avoid LMI?
Yes, some buyers can avoid LMI or reduce what they pay. The right option depends on your deposit and the lender’s policy.
| Option | Who it can suit | What to check |
| Save a larger deposit | Buyers with time to keep saving | How long it will take, and how prices may move while you save |
| Family guarantee | Buyers whose parents or family own property | The guarantor’s risk, and each lender’s guarantee policy |
| Government home buyer schemes | Eligible first home buyers | Current scheme eligibility and price caps |
| Use equity in an existing property | Upgraders and investors | Your current loan balance and a valuation of the existing property |
| Professional Waivers | Doctors, dentists, lawyers, accountants and other eligible professionals | Whether your occupation and registration qualify with each lender, the maximum LVR and loan size allowed, and any minimum income requirement |
A family guarantee uses equity in a family member’s property as extra security for your loan. It can reduce or remove the need for LMI. The guarantor’s property is at risk if you cannot repay, so anyone considering it should get their own independent advice first.
Paying the premium is also a valid choice. For some buyers, buying sooner makes more sense than saving for several more years. We set out both paths so you can compare the cost of each before deciding.
Is LMI the same as mortgage protection insurance?
No. LMI covers the lender. Mortgage protection insurance is personal cover designed to help with your repayments if you cannot work because of illness or injury, and income protection and life cover work in a similar way for you and your family.
The names sound alike, which is why the two get mixed up. Personal cover like this is a conversation for a financial adviser, and Astute Financial Camp Hill can connect you with authorised advisers through our financial planning partners.
Your home and contents cover is a separate policy again. Our general insurance brokers can review it at the same time as your loan, and as finance brokers in Camp Hill, we find that sorting finance and insurance together means fewer gaps and less duplicated paperwork.
Key takeaways
- LMI protects the lender, and the borrower pays for it.
- It usually applies when your deposit is below the level a lender requires.
- A larger deposit or a family guarantee can reduce or remove LMI, depending on the lender.
- Paying the premium to buy sooner can be a reasonable choice once the costs are compared.
Frequently asked questions
Does LMI help me if I cannot make my repayments?
No. LMI protects the lender if the loan cannot be repaid, and it provides no cover for you. Personal insurance such as income protection is designed to help borrowers in that situation.
Can I get my LMI back if I refinance?
Generally, LMI stays with the original loan and does not move to a new lender, so refinancing with low equity can mean paying it again. Ask about this before you switch lenders.
Can a first home buyer avoid LMI?
Some can. A larger deposit or a family guarantee may help, and some first home buyers may be eligible for government home buyer schemes which are the most streamline and popular option.
Does a low valuation affect LMI?
Yes. Your LVR is based on the lender’s valuation, so a figure below the purchase price raises your LVR. That can trigger LMI or increase the premium.
Is it a bad idea to pay LMI?
It depends on your situation. Paying the premium can let you buy sooner, which suits some buyers better than saving for longer. We can compare both options with you.
If you would like to know if LMI applies to your purchase, the team at Astute Financial Camp Hill can run through your numbers with you at our Newman Avenue office.
This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. The author as well as their representatives, agents and employees give no guarantees and make no representations, express or implied, as to the accuracy, currency, completeness or suitability of the information contained in this document. Nor do they accept any liability whatsoever as a result of any information herein being incorrect, incomplete or unsuitable or as a result of a person in any way using or relying on the information herein.
