LMI Explained: What It Is and How to Avoid It

Lenders Mortgage Insurance (LMI) is one of the biggest surprise costs for first home buyers. It can add $10,000-$30,000 to your loan.

Here's what it is, when you pay it, and how to avoid it.

What is LMI?

LMI protects the lender (not you) if you default on your loan.

You pay for it, but it covers them. If you stop paying your mortgage and the bank repossesses your house, LMI covers their loss.

It's a one-off cost, usually added to your loan amount (so you pay interest on it for 30 years).

When do you pay LMI?

You pay LMI when you borrow more than 80% of the property value.

Example:

• Property: $700k
• Deposit: $35k (5%)
• Loan: $665k (95% LVR)
• LMI: ~$22,000

The smaller your deposit, the higher your LMI.

How much does LMI cost?

It depends on:

• Your LVR (loan-to-value ratio): 95% LVR = much higher LMI than 85%
• Your loan amount: Bigger loan = higher LMI
• Owner-occupier vs investor: Investors pay more

Typical costs:

• $500k loan, 90% LVR: ~$8,000
• $700k loan, 95% LVR: ~$22,000
• $1M loan, 90% LVR: ~$18,000

Use our LMI Calculator to get your exact cost.

How to avoid LMI

1. Save a 20% deposit

The most obvious way. If you borrow 80% or less, no LMI.

Example:

• $700k property
• $140k deposit (20%)
• $560k loan (80% LVR)
• LMI: $0

2. First Home Loan Deposit Scheme (FHLDS)

If you're a first home buyer, you can buy with a 5% deposit and no LMI. The government guarantees part of your loan.

Eligibility:

• First home buyer
• Australian citizen or permanent resident
• Income under $125k (single) or $200k (couple)
• Property price under caps (varies by location, e.g., $800k in Melbourne)

Catch: Limited spots (10,000/year). Apply early.

3. Family guarantee

Your parents use their property as security. You can borrow up to 100% without LMI.

How it works:

• You borrow $700k
• Parents guarantee $140k (20%) using their home equity
• No LMI

Risk: If you default, your parents are liable.

4. Professional LMI waivers

Some lenders waive LMI for certain professions (usually up to 90% LVR):

• Doctors
• Lawyers
• Accountants
• Engineers (some lenders)

Ask your broker or lender if you qualify.

Should you wait to save 20%?

It depends. Let's compare:

Option A: Buy now with 5% deposit

• Pay $22k LMI
• Stop paying rent immediately
• Start building equity now
• Benefit if property prices rise

Option B: Wait 2 years to save 20%

• Save $22k LMI
• Pay $62k rent over 2 years ($600/week)
• Risk property prices rising while you save
• Better interest rates (20% deposit)

The maths: If it takes 2 years to save the extra 15%, you'll pay $62k in rent. That's worse than the $22k LMI.

But if property prices drop or you get better rates with 20%, waiting might be smarter.

Can you refinance to remove LMI?

Sort of. LMI is a one-off cost. Once you've paid it, it's gone.

But if your property value increases or you pay down your loan, your LVR drops. When you hit 80% LVR, you can refinance without paying LMI again.

Example:

• You bought at $700k with 5% deposit (95% LVR) and paid $22k LMI
• After 3 years, property is worth $800k and you've paid down to $630k
• New LVR: 78.75% (under 80%)
• If you refinance now, no new LMI

Is LMI tax deductible?

No for owner-occupiers.

Yes for investors (spread over 5 years or the loan term, whichever is shorter).

LMI vs genuine savings

Some lenders require "genuine savings" if you're borrowing above 90%. This means your deposit must be saved over 3-6 months (not a gift or windfall).

If you can't show genuine savings, you might:

• Be capped at 90% LVR
• Pay higher LMI
• Be rejected by some lenders

The verdict on LMI

Avoid it if you can (20% deposit, FHLDS, family guarantee, professional waiver).

But don't let it stop you buying if:

• You're paying high rent
• Property prices are rising
• You can afford the repayments

LMI is expensive, but so is waiting 2-3 years while paying rent and watching prices rise.