Understanding Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) – the fee we all love to hate!
But before you do, let’s think of LMI as the bouncer at the homebuyer’s club, letting you in without a full 20% deposit. Sure, it’s not a free pass, but it gets you through the doors way sooner than waiting in line forever (see what we did there? 😉).
Let’s break down what LMI actually is, why it exists, and how it affects your home-buying journey.
What is LMI?
LMI protects the bank, not you... Yup, it protects your lender in case you can’t make your mortgage repayments and insures them for taking a higher risk by lending you more for your purchase upfront with a smaller deposit. The closer your deposit is to 20%, the less LMI you’ll pay. If you can boost your savings even slightly, it could significantly reduce this fee, so every dollar counts!
Most lenders advise to aim for a deposit of at least 5% of your purchase price i.e. 5% of $500,000 purchase price = $25,000 deposit. HOWEVER we recommend aiming for 8% ($40,000) as you’ll need the 5% deposit + additional funds to pay for the LMI, stamp duty, government fees & solicitor fees. Check out our blog on additional costs to consider when buying a home.
Why Might You Need LMI?
LMI isn’t just a bank’s safety net—it can actually be a game changer for buyers who don’t have a massive deposit saved. Instead of waiting years to reach 20%, LMI allows you to get into the property market sooner—which is a huge win in a rising market.
Without LMI, many buyers would be stuck renting or trying to out-save property price increases (which, let’s be honest, is tough!). Buying sooner means potential capital growth instead of watching property prices rise from the sidelines.
What’s the Cost of LMI?
You can pay LMI upfront at settlement or capitalise it (add it to your loan amount), spreading the cost over the life of your loan.
LMI costs vary depending on:
Your deposit size (smaller deposit = higher LMI)
Your loan amount (higher loan = higher LMI)
Your lender (each lender has different LMI rates).
The Interest Rate on your home loan can be higher vs loans without LMI payable. Having access and being able to compare to multiple lenders is so important to ensure you’re getting the best deal!
Chat with your broker and they can give you an idea of what LMI cost you might be up for, based on your circumstances and lender options.
Can You Get a Refund on LMI?
LMI is usually a one-way ticket, but some lenders offer partial refunds if you refinance or pay off your loan within the first 2 years. It’s worth checking with your broker…
What Happens If You Default on Your Loan?
If you can’t make your repayments and the bank sells your property at a loss, the LMI insurer covers the shortfall… but the insurer can chase you for the difference.
Chat with your broker if you’re ever in a sticky situation.
What About Refinancing?
If you refinance and still borrow more than 80% of your property's new value, you will likely need to pay LMI again with the new lender. However, if your equity has increased or you’ve paid down your loan substantially, you might avoid paying LMI with your new loan.
Can You Avoid LMI?
Not everyone has to pay LMI—here’s how some buyers avoid it:
✅ Save a 20% deposit – This is the simplest way, but not always achievable.
✅ Use a family guarantor – A parent or family member can offer equity from their home to cover part of your deposit.
✅ Qualify for an LMI waiver – Some lenders offer waivers for low-risk professions like doctors, lawyers, and accountants.
✅ First Home Guarantee Scheme – A government initiative allowing first home buyers to buy with as little as 5% deposit without LMI.
To check your eligibility, talk to your broker to explore your options.
You can also check out our blogs on First Home Buyer Entitlements or The Role of a Guarantor in Home Buying for more info.
Whilst paying LMI might seem expensive, entering the market sooner could save you more in the long run. And, whilst it’s not nice to pay, it's also a tool that can help you achieve your dream of homeownership sooner.
Ready to chat numbers? Book in a chat with us today!
Your Broker,
Tara
