What is lender’s mortgage insurance (LMI)?
Lender's mortgage insurance (LMI) is an insurance premium some borrowers need to pay for if their home deposit or equity is less than 20% of their property’s value. In other words, borrowers whose loan-to-value ratio (LVR) is above 80%.
These loans are considered a higher risk to the lender, so LMI is passed on to the borrower as a non-refundable fee.
LMI covers the lender against the risk of default. For example, if a borrower can’t repay their loan and the lender can’t recoup the total loan amount because the property is sold at a loss.
If you have a 20% deposit (or equity), you don’t have to pay for LMI because your LVR is below 80% and considered less risky. The lower your LVR, the lower the risk to the lender.
Keep in mind that LMI only covers the lender, not you (or any guarantor), although you’ll have to pay for it.
How and when do you pay LMI?
You can pay for LMI as a lump sum upfront at settlement, but the most common option is to add LMI to your home loan balance (known as capitalisation). The lender will take care of this for you. Remember that this will increase your loan amount and your total interest payable.
How do lenders calculate LMI?
Most lenders calculate LMI on a tiered scale based on your LVR. They will take into account:
- Your property value (based on the lender's assessment)
- Your deposit (or equity) relative to the property value
- Your loan amount (what you borrow)
- Your loan product (e.g. owner-occupier, investor loan)
- The type of property you buy (e.g. established home, vacant land)
Generally, the higher your LVR, the higher your LMI will be. LMI is generally higher on investment home loans compared to owner-occupied home loans, according to the Helia fee estimator. Lenders calculate LMI differently, so it’s best to get a quote directly from your lender.
How much does LMI cost?
Based on Money.com.au's analysis, LMI can cost around 1-5% of your home loan amount, depending on your LVR. If you have more than a 20% deposit, your LMI is $0. Here is an estimation of lender's mortgage insurance (LMI) costs for different property values and deposit percentages.
Property value | $500,000 |
|---|---|
20% deposit (80% LVR) | $0 |
15% deposit (85% LVR) | $6,266 |
10% deposit (90% LVR) | $14,184 |
5% deposit (95% LVR) | $17,028 |
Property value | $600,000 |
20% deposit (80% LVR) | $0 |
15% deposit (85% LVR) | $12,850 |
10% deposit (90% LVR) | $22,835 |
5% deposit (95% LVR) | $26,305 |
Property value | $700,000 |
20% deposit (80% LVR) | $0 |
15% deposit (85% LVR) | $17,350 |
10% deposit (90% LVR) | $26,740 |
5% deposit (95% LVR) | $30,797 |
Property value | $800,000 |
20% deposit (80% LVR) | $0 |
15% deposit (85% LVR) | $21,850 |
10% deposit (90% LVR) | $31,900 |
5% deposit (95% LVR) | $35,554 |
Property value | $900,000 |
20% deposit (80% LVR) | $0 |
15% deposit (85% LVR) | $26,350 |
10% deposit (90% LVR) | $36,060 |
5% deposit (95% LVR) | $40,080 |
Property value | $1,000,000 |
20% deposit (80% LVR) | $0 |
15% deposit (85% LVR) | $30,850 |
10% deposit (90% LVR) | $40,135 |
5% deposit (95% LVR) | $44,607 |
| Property value | 20% deposit (80% LVR) | 15% deposit (85% LVR) | 10% deposit (90% LVR) | 5% deposit (95% LVR) |
|---|---|---|---|---|
$500,000 | $0 | $6,266 | $14,184 | $17,028 |
$600,000 | $0 | $12,850 | $22,835 | $26,305 |
$700,000 | $0 | $17,350 | $26,740 | $30,797 |
$800,000 | $0 | $21,850 | $31,900 | $35,554 |
$900,000 | $0 | $26,350 | $36,060 | $40,080 |
$1,000,000 | $0 | $30,850 | $40,135 | $44,607 |
Should you pay LMI upfront or add it to your home loan?
Paying for LMI upfront will be the cheapest option, but most borrowers add the LMI to their home loan amount to spread the cost over the life of the loan.
The downside to doing this is you'll be charged interest on the cost of the LMI and your home loan. You could use an offset account linked to your home loan to deposit your savings and salary into and offset your interest.
Money’s Editor Sean Callery, who opted to add LMI to his home loan, said it was the right decision for his family at the time.
Sean Callery, Money's Editor
“We found a house we liked, and the time was right for us to stop renting and get a place of our own. We could have saved for another six months to avoid the LMI, but that would have meant needing to renew our rental lease for a year and then dealing with potentially breaking the lease in six months. We also knew we could comfortably afford the loan repayments even with the LMI added to our loan balance and could pay some extra to pay off the LMI amount quickly. We were also confident we’d be staying in the house we bought for a long time, and have the potential for our property to increase in value over the long term to offset the cost of the LMI we paid.”
Sean Callery, Money's Editor
Cost compared: LMI added to home loan vs paid upfront
Here’s a cost comparison of LMI added to a home loan versus paid upfront on a $600,000 mortgage with a 6.00% interest rate over a 30-year loan term.
| Home loan with 95% LVR | LMI added to home loan | LMI paid upfront |
|---|---|---|
Interest rate | 6.00% p.a. | 6.00% p.a. |
Loan amount | $570,000 | $570,000 |
LMI cost* | $26,305 (added to loan) | $26,305 (paid upfront) |
Monthly repayments | $3,575.15 | $3,417.44 |
Total interest payable | $690,749 | $660,278 |
Total to repay | $1,287,054 | $1,230,278 |
In this example, the borrower who added LMI into their home loan pays:
- An extra $158 in monthly repayments
- $56,776 to cover the cost of their LMI, including interest, compared to the $26,305 needed to pay for it upfront
- That’s $30,471 extra based on the interest charged on the LMI amount over the life of the loan
How to get LMI waived
1. Get a guarantor
You can avoid paying LMI with a guarantor on your home loan. A guarantor is usually a family member who uses the available equity in their home to secure your mortgage. If your deposit is less than 20% of the property, a guarantor could cover the shortfall, so that LMI isn’t required. Guarantor home loans are sometimes known as low deposit home loans or no deposit home loans.
Keep in mind that your guarantor will be partially responsible for your debt. A caveat may be placed on their property (a type of interest that prevents it from being sold or dealt with) until they’re released from the loan.
2. Apply through the Home Guarantee Scheme (HGS)
Lenders will waive your LMI if you apply for a home loan through the Australian government's Home Guarantee Scheme (HGS). It allows eligible home buyers to get on the property market with a deposit as little as 2-5%. Housing Australia guarantees the rest.
There are a few different avenues available to home buyers through HGS programs, including:
- First Home Guarantee (FHBG): For eligible first-home buyers to buy a home with a deposit starting from 5% with no LMI.
- Regional First Home Buyer Guarantee (RFHBG): For eligible first-home buyers to buy a home in a regional area with a deposit starting from 5% with no LMI.
- Family Home Guarantee (FHG): For eligible single parents or single legal guardians of at least one dependent to buy a home with a deposit starting from 2% with no LMI.
Most states and territories also have the First Home Owner Grant (FHOG), which provides a one-off, tax-free payment to first-home buyers to purchase a new home.
3. Save a 20% deposit
If you’re getting close to a 20% deposit, it may be worth saving the remaining amount over the next 12-18 months to avoid LMI. This could save you thousands of dollars upfront and even more in interest over the loan term if you capitalise your LMI. Even going from a 5% to 10% deposit can save you a few bucks. On the average home loan for first home buyers, going from a deposit of 5% to 10% would mean needing to save up roughly another $30,000.
But with property prices consistently rising in Australia, getting into the property market sooner with a lower deposit and paying LMI can be a good option. That’s because the 20% deposit lenders require to waive LMI is based on the current value of the property. If property prices go up, your 20% deposit would need to be bigger by the time you’re ready to buy.
4. Compare lenders offering LMI discount offers
Some lenders offer LMI discounts or even waive LMI on select loan products if you meet the eligibility criteria, including having an excellent credit score. For example, some lenders in Australia (e.g. Pepper Money, UNO) don’t charge LMI, but may tack on ‘risk fee’ on your loan instead. Some offer LMI discounts to eligible home buyers.
LMI offers (2023)
- Ubank: No LMI on owner-occupied home loans with an LVR of up to 85% and principal and interest (P&I) repayments. Offer available on Neat Variable and Flex Home Loans. Conditions apply. Apply by 8 December 2023, and settle by 8 April 2024.
- RAMS: First-home buyers with an LVR up to 95% only pay $1 for LMI on Essential Home Loan, Full Featured and Fixed Rate Home Loans if their LMI premium is below 30,000. For home loans where the LMI premium exceeds $30,000, RAMS will pay $30,000 towards the premium. Offer may be withdrawn at any time.
- St. George Bank, Bank of Melbourne & BankSA: These Westpac brands have a $1 LMI offer for first-home buyers with a minimum deposit of 15% (min LVR of 85%) on loan amounts of up to $850,000. Offer available on Basic Home Loans and Advantage Package Home Loans. Owner-occupier home loans with principal & interest repayments only. Offer ends 18 November 2023.
5. Check if you’re eligible for an LMI waiver based on your profession
Some banks and lenders have an LMI waiver for professionals in certain secure or high-paying industries — commonly legal and medical practitioners, finance and accounting professionals, etc. Banks that offer an LMI waiver for professionals include ANZ, NAB and Westpac. The eligibility criteria for LMI waivers vary between lenders but generally include:
- Maximum LVR of 90-95% (depending on the profession)
- Minimum annual income of $90,000 - $150,000 (depending on the profession)
- The applicant must be a member of their industry's peak body or authority (e.g. Australian Medical Association)
Who’s eligible for an LMI waiver?
The following professions may be eligible for an LMI waiver depending on the lender:
- Dentists, doctors and surgeons
- Pharmacists
- Lawyers, solicitors, barristers
- Financial advisers
- Other medical staff (e.g. nurses, optometrists)
- Veterinarians
- Accountants
- Engineers
- Construction surveyors
How to avoid LMI when refinancing
You need at least 20% equity in your home to refinance and avoid paying LMI. You can increase equity in your property by making extra repayments on your mortgage (e.g. adding your tax return to your home loan each year) or making improvements to your home to increase its value. If you have a mortgage broker, get them to ‘shop the valuation’ across 3-5 lenders to see who gives you the best valuation.
If you refinance with less than 20% equity in your home, you may have to pay LMI again. This is because LMI is not transferable between home loan products or lenders. Refinancing without at least 20% equity in your home and paying another LMI premium could offset any savings you make from getting a lower rate.
