A Guide to Lenders Mortgage Insurance (LMI) in Australia

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) protects the lender if a borrower defaults on their home loan. In Australia, LMI is typically required when a borrower has a deposit of less than 20% of the property’s purchase price. It allows buyers to enter the property market sooner and purchase homes with a smaller deposit than would otherwise be required. LMI is a one-off fee paid upfront at settlement or added to the loan amount and repaid over time. While it protects the lender, not the borrower, it offers significant advantages to homebuyers who might not have the full 20% deposit saved.

How LMI can help you buy a better property

LMI benefits borrowers in several ways, particularly by enabling them to:

1. Enter the market sooner

Without LMI, banks and lenders typically require at least a 20% deposit to approve a loan. Saving this amount – especially in high-demand property markets – can take years for many Australians. LMI allows buyers to secure a home loan with a deposit as low as 5%, significantly reducing the time needed to enter the market.

2. Access more desirable locations

Since LMI enables buyers to borrow a larger portion of the property price, it can help them afford properties in better locations. Instead of settling for a less desirable suburb due to deposit constraints, buyers can use LMI to secure a home in a preferred area with better amenities, schools, and potential for property value growth.

3. Purchase a higher value property

LMI increases a borrower’s purchasing power. Instead of being limited by a 20% deposit requirement, buyers can secure a larger loan and afford a property that better suits their needs, whether that means a bigger home, a better layout, or an investment with higher long-term value.

4. Take advantage of market conditions

Property prices in Australia often rise over time, and waiting years to save a 20% deposit may mean missing out on capital growth. Using LMI to buy sooner, borrowers can benefit from potential property appreciation rather than watching prices climb while they save.

5. Keep savings for other expenses

Buying a property involves more than just the deposit. There are also stamp duty costs, legal fees, moving expenses, and potential renovations. Using LMI, buyers can preserve some of their savings for these other expenses instead of tying all their funds into the deposit.

How LMI works in practice

When a borrower applies for a home loan with a deposit of less than 20%, the lender assesses the risk of lending a higher loan-to-value ratio (LVR). If the lender deems the risk acceptable but still requires protection, they take out LMI through a provider like Helia (formerly Genworth) or QBE. LMI costs will vary greatly depending on the loan amount, LVR, and the lender’s policies.

Who pays for LMI?

Although LMI protects the lender, the borrower is responsible for the cost. This cost can be:

– Paid upfront at settlement; or

– Added to the loan amount and repaid over time.

Adding LMI to the loan means borrowers will pay interest on it, increasing the overall loan costs. However, it allows buyers to secure a property sooner rather than delaying their purchase to save a larger deposit.

LMI cost example

The cost of LMI depends on several factors, including the total loan amount, the size of your deposit, and the lender chosen.

For example, if a borrower purchases a $600,000 property with a 10% deposit ($60,000), their LVR is 90%. Depending on the lender and insurer, the LMI premium might range between $10,000 and $15,000.

Can LMI be avoided?

Yes, LMI can be avoided in a few ways:

1. Save a 20% deposit

By saving a 20% deposit, you reduce your LVR to 80%, thereby reducing the risk to the lender.

2. First Home Buyer Schemes

Some first-time buyers may qualify for government schemes that allow them to purchase a home with a low deposit without paying LMI. Examples include:

First Home Guarantee (FHG): This program allows eligible first–time buyers to buy with just a 5% deposit without LMI, as the government guarantees the loan.

Family Home Guarantee: Helps single parents buy with a 2% deposit and no LMI.

Checking eligibility for these schemes can help buyers reduce costs.

3. Parental Guarantees

Some lenders offer “family guarantee” loans, where a parent or close family member provides equity in their property as security for part of the loan, eliminating the need for LMI.

For more information on family guarantee loans – CLICK HERE.

Pros and Cons of LMI

Pros:

Enables earlier homeownership – No need to wait years to save a 20% deposit.
Increases borrowing power – Allows buyers to access better properties or locations.
Takes advantage of market growth – Avoids being priced out of the market due to rising property values.
Provides flexibility – Borrowers can keep some savings for other costs instead of using all funds for a deposit.

Cons:

Adds to loan costs – LMI increases total borrowing and interest costs if added to the loan.
Does not protect the borrower – LMI only protects the lender in case of default, not the homeowner.
Varied costs – LMI premiums vary between lenders and insurers, making it difficult to compare exact costs upfront.

Is LMI worth it?

Whether LMI is worth it depends on your financial situation and property goals. If waiting to save up a 20% deposit means missing out on opportunities or settling for a less ideal home, LMI can be a smart move. That said, weighing up the extra cost against the benefits of buying sooner is essential. Don’t forget to consider other options, like government schemes or parental guarantees, as alternatives to LMI.

LMI Exceptions for Professionals

Lenders Mortgage Insurance (LMI) is typically required when borrowing over 80% of a property’s value. However, did you know some professionals may be eligible for special LMI waivers or discounts – even up to 90% or 95% Loan-to-Value Ratio (LVR)?

These exceptions can significantly reduce upfront costs and improve borrowing capacity. Occupations such as doctors, medical specialists, nurses, accountants, lawyers, and other allied health professionals often qualify under these tailored lending policies. Each lender has its own criteria and the benefits can vary – so it’s essential to get expert advice.

Want to find out if you qualify for an LMI discount as a professional?

CONTACT US TODAY, and let’s explore your options together.

Lenders Mortgage Insurance plays a crucial role in the Australian property market, helping buyers with low deposits secure home loans and access better properties. While it adds cost to the loan, it provides the opportunity to enter the market sooner, take advantage of price growth, and purchase homes in preferred locations. Before deciding, buyers should compare their options, use an LMI calculator to estimate costs, and seek professional advice to ensure they make an informed decision.

CONTACT US today for more information on whether LMI may be right for you.