Lenders Mortgage Insurance (LMI) is a cost that may apply when you’re buying a property with a smaller deposit.
Put simply, if you don’t have a large enough deposit to meet a lender’s usual criteria, the lender takes on more risk — and LMI is used to protect them against that risk.
It’s one of those terms that comes up often when people start looking at buying a home, but it’s not always well understood.
When do you have to pay LMI?
In most cases, LMI applies when your Loan to Value Ratio (LVR) is above 80%.
That means:
- If you have a 20% deposit or more, LMI is usually not required
- If your deposit is less than 20%, LMI will likely apply
For example, if you’re buying a property with a 10% deposit, the lender is funding 90% of the purchase — which increases their exposure if something goes wrong.
What does LMI actually cover?
This is where many people get caught out.
LMI protects the lender — not you.
If, for whatever reason, you’re unable to meet your loan repayments and the property is sold at a loss, LMI helps cover the lender’s shortfall.
It doesn’t provide personal protection to the borrower.
How much does LMI cost?
The cost of LMI can vary depending on:
- The size of your loan
- The size of your deposit
- The lender you’re working with
In some cases, it can be a noticeable upfront cost.
Some lenders allow you to add (capitalise) the LMI into your loan, which can reduce the immediate cash required. However, this also means you’ll be paying interest on that amount over time.
Should you try and avoid LMI?
This is where the conversation becomes more strategic.
Many people are focused on avoiding LMI altogether — which is understandable. But in some situations, paying LMI may allow you to enter the property market sooner rather than later.
The question then becomes:
Is it better to wait and save a larger deposit…
Or move forward earlier and start building momentum?
There’s no one-size-fits-all answer. It depends on your broader financial position, your timeframes, and what you’re ultimately trying to achieve.
My Final Thoughts
Like many things in lending, LMI isn’t inherently good or bad — it’s simply a tool.
If you’re unsure whether LMI applies to you, or whether it makes sense in your situation, it can help to step back and look at the bigger picture.
If you’d like to talk it through, we’re always happy to have a conversation about where you are now and where you’re trying to get to.The key is understanding how it fits into your overall plan, rather than looking at it in isolation.
Because buying a property isn’t just about getting a loan approved — it’s about making a decision that supports where you want to be in the years ahead.
NB: The content in this blog was accurate as at October 2020.