Lenders mortgage insurance: What is it and how is it calculated?
Saving for a home loan deposit can be seriously challenging in today’s market, so what happens if you’re struggling to meet the recommended 20% of the property’s value?
Many lenders do offer low deposit home loans, but having a deposit of less than 20% often means you’re deemed a more risky borrower to the banks.
As a result, borrowers that have saved under 20% for their home loan deposit often come with the caveat that you need to pay lenders mortgage insurance (LMI).
Key points
- Lenders mortgage insurance protects the lender if you’re no longer able to meet your home loan repayments and your property needs to be sold.
- Your lender will likely pass on the cost of lenders mortgage insurance to you.
- It’s likely you’ll be required to pay lenders mortgage insurance if your deposit is less than 20% of the home’s value.
What is lenders mortgage insurance?
Lenders mortgage insurance is insurance that protects the lender, not you. It is taken out to protect the lender from financial loss if you are no longer able to meet your home loan repayments, and it’s unable to recover the outstanding loan amount through the sale of your property.
While LMI covers the lender, it is likely that your lender will pass on the cost of the insurance to you. You’ll likely be required to pay lenders mortgage insurance if your first deposit is less than 20% of the home’s value – that is, you have a loan-to-value ratio (LVR) of 80% or higher.
Lenders mortgage insurance can be a one-off payment made during the home loan settlement, but more often it is lumped into the overall cost of your home loan so you pay it off over time. Be aware that if lenders mortgage insurance is tacked onto your home loan, it will accrue interest and ultimately see you pay more in the long run.
How is lenders mortgage insurance calculated?
Lenders mortgage insurance is calculated using a number of factors, including:
- The size of your home loan
- The size of your deposit
- Your loan-to-value ratio
- The loan type (owner occupier or investor)
- The property’s estimated value
- Your employment status
- Your lender and the insurance provider it uses
How much does lenders mortgage insurance cost?
The cost of lenders mortgage insurance is impacted by a range of factors, but generally speaking, it can account for between 1-5% of your home loan.
Also keep in mind that if you add the cost of LMI onto your overall home loan, it will accrue interest over time and cost more in the long run.
To help you get an idea of just how much lenders mortgage insurance can cost, we’ve run some scenarios in the tables below.
Scenario 1 – A seasoned property owner has found a great investment studio that is bargain priced at just $250,000.
| Deposit amount | Cost of LMI † |
| 5% | $7,569 |
| 10% | $4,361 |
Scenario 2 – A first home buyer is looking to purchase their first home worth $600,000.
| Deposit amount | Cost of LMI † |
| 5% | $23,954 |
| 10% | $13,284 |
Scenario 3 – A young couple are on the hunt for their first family home and have a budget of $800,000.
| Deposit amount | Cost of LMI † |
| 5% | $31,939 |
| 10% | $17,712 |
†Prices taken from Helia on 9 May 2024 for a home loan period of up to 30 years.
How can I avoid paying lenders mortgage insurance?
There are a few ways you can avoid paying lenders mortgage insurance:
Save a 20% deposit
The first option is to continue saving until you have a home deposit of at least 20%. Doing so will also give you the benefit of qualifying you for lower interest rates, as low deposit home loans can come with higher interest rates.
Use a guarantor
You can waive the cost of lenders mortgage insurance by asking your parents or another family member about going guarantor for your home loan. A guarantor uses a portion of their own property (that is, their home equity) to act as security for your mortgage.
Using a guarantor helps lessen your overall risk in the lender’s eyes, as the guarantor effectively becomes insurance in case you can no longer make repayments. Keep in mind that if you are unable to meet your mortgage repayments, your guarantor will be liable to pay for the portion of the home loan they guaranteed.
Government grants and buying schemes
There are various government grants and buying schemes available which can help you avoid paying lenders mortgage insurance. For example, the First Home Guarantee (FHBG) scheme is run by the Australian government and allows those eligible to buy their first home with a deposit as small as 5%, without needing to pay for LMI.
Other home buying schemes vary across states and territories, so explore which of these options are available to you if you’re struggling to save for a 20% deposit.
Use a cash gift
If you’re lucky enough to have received a substantial cash gift, it can be used to form part of or all of your home loan deposit to get you across the minimum 20% threshold.
Keep in mind that even if your cash gift gets you to a 20% deposit, lenders will still assess other factors such as your salary and your savings over time, to determine how much money they’ll let you borrow.
Compare home loan offers
It’s important to compare home loans before deciding on a lender, particularly when there are providers out there which waive or reduce the cost of LMI for deposits of at least 15%. For example, if you have a 15% deposit you can apply for certain home loans at UBank without needing to pay for lenders mortgage insurance.
How do I pay for lenders mortgage insurance?
LMI can be paid for in a one-off lump sum at loan settlement, but more often, it is added onto your overall home loan amount. While this method can spread out the cost of lenders mortgage insurance over time, it also increases your home loan amount, which means it will accumulate interest over time and see you pay more.
Who is exempt from lenders mortgage insurance?
Certain professions can be made exempt from lenders mortgage insurance, including health and medical professionals, legal professionals, accountants, mining engineers, professional athletes and entertainment professionals.
These job industries can be made exempt from LMI because they are typically high paying, and in most cases, you will need to demonstrate an annual income of at least $150,000 to waive lenders mortgage insurance.
If you don’t work in one of these industries, you may still be exempt from paying LMI if you are a first home buyer using the Australian government’s First Home Guarantee scheme.
Lenders mortgage insurance: FAQs
Is lenders mortgage insurance transferable?
Unfortunately, no, lenders mortgage insurance is not transferable. That means if you’re paying LMI and decide to refinance your mortgage, you will have to pay the premium again if your loan-to-value ratio is still higher than 80%. If you managed to lower your LVR to less than 80% while paying off your home loan, you’ll no longer need to pay LMI if you refinance.
What are the benefits of lenders mortgage insurance?
Lenders mortgage insurance provides a way for first home buyers to break into the property market without having the typical 20% deposit. While it does not protect you (the borrower), it helps make you a less risky candidate for a home loan.
Do I need to organise lenders mortgage insurance?
No, you do not have to arrange a lenders mortgage insurance policy by yourself. The lender will organise this on your behalf, as different home loan providers will use different insurance providers.
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