Lenders mortgage insurance, or LMI, is insurance a lender takes out to reduce its risk when approving certain home loans—commonly loans above 80% of the property value. The lender usually passes the premium cost to the borrower, but the policy protects the lender, not the borrower.
LMI can make it possible to buy with a smaller deposit. It can also add thousands of dollars to the upfront cost or loan balance, depending on the loan, LVR, lender and insurer.
It should not be viewed as automatically good or bad. The real decision is whether the cost and larger loan are acceptable in exchange for buying sooner.
📑 Table of Contents
- How LMI works
- Who does LMI protect?
- When might you have to pay LMI?
- How the LVR is calculated
- How much does LMI cost?
- How is the premium paid?
- Does LMI disappear when your loan reaches 80% LVR?
- Can you pay LMI twice?
- Ways LMI might be avoided
- When paying LMI could make financial sense
- The risk of starting with limited equity
- Questions to ask about an LMI quote
- Frequently asked questions
- Compare the complete cost of buying sooner
- Sources and further reading
How LMI works
The basic sequence is:
- You apply for a home loan with a deposit below the lender’s preferred level.
- The lender assesses your income, expenses, debts, credit history and the property.
- If the application is approved subject to LMI, the lender obtains an insurance policy.
- The lender pays the insurer and usually passes the premium cost to you.
- If you later default, the lender may enforce the mortgage and sell the property.
- If the sale proceeds do not cover the loan and eligible recovery costs, the lender may claim the insured shortfall.
An LMI claim does not necessarily erase the borrower’s debt. The insurer may seek to recover the paid shortfall from the borrower, subject to the circumstances and applicable law.
Who does LMI protect?
LMI protects the lender against an insured loss. It does not cover your mortgage repayments if you lose your job, become ill or experience financial hardship. You cannot make a claim on the policy simply because its cost was passed to you.
It is different from:
- home building insurance, which covers insured damage to the building
- contents insurance, which covers belongings under the policy
- mortgage protection or income-protection cover, which may provide specified benefits to the insured person
- the Australian Government 5% Deposit Scheme, which uses a government guarantee instead of LMI for eligible loans.
When might you have to pay LMI?
LMI commonly becomes relevant when the loan exceeds 80% of the lender’s accepted property value. This corresponds to having less than a 20% contribution before purchase costs.
However, 80% is a common benchmark—not a universal law. Whether LMI applies can depend on:
- the lender and product
- the exact LVR
- loan amount
- property type and location
- whether the premium is added to the loan
- your occupation or lender-specific waiver policy
- use of a government or family guarantee
- the insurer’s approval requirements.
A lender can also have maximum LVRs below 80% for a property or application it considers higher risk. Conversely, an eligible guarantee or waiver may allow a loan above 80% without LMI.
How the LVR is calculated
The basic calculation is:
Loan amount ÷ lender-accepted property value × 100 = LVR
For a property bought and valued at $700,000:
- a $560,000 loan is 80% LVR
- a $630,000 loan is 90% LVR
- a $665,000 loan is 95% LVR.
If you agree to pay $700,000 but the lender values the home at $680,000, it will generally use its accepted value when calculating the lending position. A planned $630,000 loan would then be about 92.6% LVR, potentially changing the premium or approval.
Lenders may also consider a capitalised LMI premium when determining the final LVR. Ask for the base and final figures rather than calculating only from the cash deposit.
How much does LMI cost?
There is no single LMI percentage. The premium can depend on the loan amount, LVR, lender, insurer, borrower type and property. It may rise in steps as the LVR crosses particular bands.
This means:
- two lenders can quote different premiums for similar loans
- an extra contribution may reduce the premium by more than the contribution itself if it moves the loan into a lower pricing band
- the cheapest LMI premium does not automatically identify the cheapest overall loan.
Request a lender-specific quote. Compare the interest rate, fees, LMI, repayment and loan features together.
How is the premium paid?
The premium is generally a one-off charge associated with settlement. Depending on the lender, you may:
- pay it from your own funds
- add all or part of it to the home loan, known as capitalising the premium.
Capitalising LMI reduces the cash needed upfront, but you then borrow the premium and pay interest on it. It may also increase the final LVR and must remain within the lender’s policy.
For example, if an LMI premium were $15,000 and added to a 30-year loan, the cost would not stop at $15,000. Interest would accrue while that part of the balance remained unpaid. The actual effect depends on the rate, repayments and how quickly the loan is reduced.
Does LMI disappear when your loan reaches 80% LVR?
LMI is generally a one-off premium, not a monthly charge that automatically stops when your equity reaches 20%. Reaching 80% later does not usually trigger a full refund.
Some policies or lenders may provide a partial refund in limited circumstances and timeframes, but you should not assume one will apply. Ask before settlement if this matters to your comparison.
The practical benefit of reaching a lower LVR is that it may improve future refinancing options, subject to valuation, serviceability and lender policy.
Can you pay LMI twice?
Yes, it is possible. LMI generally relates to a particular lender and loan and is not portable between lenders.
If you refinance while the new loan remains above the new lender’s LMI threshold, the new lender may require a new premium. The original premium is not simply transferred. A valuation increase or loan reduction may bring the new LVR to 80% or below, but neither is guaranteed.
Before refinancing a high-LVR loan, compare any new LMI with the interest and fee savings. Falcon’s calculators can help model repayments, but obtain an actual valuation and premium estimate for a proper comparison.
Ways LMI might be avoided
Contribute a larger deposit
Reaching the lender’s no-LMI threshold—commonly 80% LVR or below—is the most direct route. Keep enough cash for purchase costs and a buffer rather than using every dollar to hit the percentage.
Use the Australian Government 5% Deposit Scheme
Eligible first home buyers can use a minimum 5% deposit without LMI through a participating lender. Eligible single parents and single legal guardians may qualify with 2%. Property price caps, occupancy rules and lender approval apply.
Use a family guarantee
A qualifying family member may offer limited security from their property to reduce the lender’s unsecured risk. This can avoid LMI, but it exposes the guarantor to legal and financial risk. Independent legal advice is important.
Qualify for a lender-specific waiver
Some lenders offer LMI waivers or alternatives for selected professions, loan sizes or application profiles. Criteria vary and can change. A waiver with a higher rate or fewer suitable features may not be the best overall deal.
Consider shared equity
The Australian Government Help to Buy Scheme can reduce the bank loan required and does not require LMI for eligible participants. In return, the Government holds a proportional interest in the property’s value. This is a different ownership and financial trade-off, not simply free LMI.
When paying LMI could make financial sense
Paying LMI may be reasonable when it helps you purchase a suitable, affordable home sooner and the benefit outweighs the cost and risk of the larger loan.
Factors supporting that case might include:
- stable income and comfortable repayments
- enough cash remaining after settlement
- a property you expect to suit for several years
- a long wait to reach 20% while continuing to pay rent
- no suitable guarantee or scheme eligibility
- a clear understanding of the premium and higher interest cost.
It may be better to keep saving where the proposed repayments are tight, employment is uncertain, the property is likely to be held briefly, or the purchase would leave no emergency buffer.
Future property prices and interest rates cannot be known. Compare scenarios without assuming that prices will always rise or that waiting is always safer.
The risk of starting with limited equity
LMI reduces the lender’s loss risk; it does not prevent negative equity for the borrower.
If you buy with a 5% contribution, purchase and selling costs can exceed the equity you initially hold. A fall in the property value or an early sale may leave sale proceeds insufficient to repay the loan and costs.
Reduce this risk by:
- buying within a comfortable budget
- keeping a post-settlement cash buffer
- avoiding unnecessary consumer debt
- planning to hold the property for an appropriate period
- making extra repayments where suitable and permitted
- choosing the property carefully rather than rushing because finance is available.
Questions to ask about an LMI quote
- What are the base and final LVRs?
- What is the premium in dollars?
- Can it be capitalised, and how does that affect the loan?
- Would a slightly larger contribution move the loan into a lower premium band?
- Are there lender, profession, government or guarantee alternatives?
- Does the loan rate change at a lower LVR?
- Could any refund apply if the loan is repaid or refinanced early?
- What is the total cash required at settlement?
Frequently asked questions
Is LMI compulsory by law above 80% LVR?
No. It is a lending-risk decision, not a universal legal charge. Lender, insurer, property and guarantee policies determine whether it applies.
Does LMI help my loan get approved?
It can allow a lender to consider a higher-LVR loan, but you must still meet credit, serviceability, deposit and property requirements. The LMI insurer may also assess the application.
Can I choose the LMI insurer?
Usually the lender arranges the policy with its chosen provider. You choose the lender and loan, not normally the insurer.
Do I still owe money after an LMI claim?
Potentially. If the property sale leaves a shortfall and the insurer pays the lender, the insurer may seek recovery from you. Speak to the lender early if you are struggling with repayments.
Is it better to pay LMI or wait for 20%?
It depends on the premium, repayment affordability, saving timeframe, rent, property plans and buffer. Compare both paths using current lender figures rather than a general rule.
Compare the complete cost of buying sooner
LMI is one line in a larger decision. Review it alongside the deposit, loan amount, rate, fees, repayments and cash remaining after settlement. Falcon’s article on the total money needed for a first home can help organise the broader budget.
For help comparing low-deposit pathways, visit Falcon’s first home buyer service page or speak with Prasanth at Falcon Lending Solutions. Falcon can request lender-specific LMI figures and show how different contributions affect the loan and settlement funds.
General information only. This article does not take into account your objectives, financial situation or needs. Credit approval, valuation, LMI approval, eligibility, lending criteria, fees and conditions apply. Government schemes and lender policies can change.