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Lenders mortgage insurance explained: what is LMI, and how could it help you buy property?

piggy bank in a protected house

If you are one of the many first home buyers out there struggling to save up that ideal 20% housing deposit, you might be happy to hear there are ways to buy with deposits at low as 5%.

But before you think “where do I apply?”, we should mention there’s a price to pay: lenders mortgage insurance. So what is this policy, and how much does it add to the cost of your home loan?

What is lenders mortgage insurance (LMI)?

LMI is an insurance banks and financial providers in Australia make borrowers pay when they have a deposit below 20%. This is to ensure they are not out of pocket if you fail to repay your mortgage.

The reason only low deposit home loans require lenders mortgage insurance is because you are borrowing a large amount of the value of the property (i.e. your LVR is extremely high), which heightens your financial risk because you could easily slide into negative equity. This makes you a risky investment to a lender.

Keep in mind, lenders mortgage insurance is only designed to protect the lender, not the borrower. So if you wanted insurance to cover your repayments because of illness or injury, then you’d need to look at taking out mortgage protection insurance.

Do I need to organise lender 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 each home loan provider will use a different insurance provider. 

How is lenders mortgage insurance calculated?

The cost of lenders mortgage insurance will depend on the amount you are looking at borrowing, the size of your deposit, and how you plan to pay your premium (i.e. upfront or monthly).

There’s no one size fits all equation you can use to determine the cost of LMI, as it will differ depending on the bank you borrow from and the insurance provider the lender uses.

However, using a LMI calculator from underwriter Helia, we can get a rough idea of the upfront lenders mortgage insurance cost depending on varying scenarios.

Scenario 1 - Peter, a seasoned property owner, has found a great investment studio that is bargain priced at just $200,000.

A B

Deposit amount

Lenders mortgage insurance
5% $6,055
10% $3,489

Scenario 2 - First home buyer Jen is looking at purchasing her first home worth $500,000.

A B

Deposit amount

Lenders mortgage insurance
5% $14,872
10% $8,680

Scenario 3 - Newlyweds Nathan and Samantha are on the hunt for their first family home and have a budget of $800,000.

A B

Deposit amount

Lenders mortgage insurance
5% $31,939
10% $17,712

* Prices taken on 9 June 2023 for a home loan period of up to 30 years

As you can see in each scenario above the difference between a 5% and 10% deposit is almost double. That’s why it always pays to diligently save the largest deposit you can to bring down the cost of lenders mortgage insurance.

When do I pay lenders mortgage insurance?

Lenders mortgage insurance can either be paid upfront or on a monthly basis as an ongoing fee of your home loan.

Because of this, keep in mind that what you don't spend on a property deposit you inevitably spend on LMI and the higher interest rates that come with having a higher LVR. (Generally speaking, lower LVRs have lower interest rates). 

Do I have to pay LMI again when refinancing your home loan?

If your loan-to-value ratio is above 80%, then you will have to fork out the cost of lenders mortgage insurance again when refinancing your home loan, as LMI is not transferrable.

If you're considering refinancing to escape rate hikes, check in with your LVR and equity before you switch lenders. 

How can I avoid paying lenders mortgage insurance?

There are two main ways you can avoid paying lenders mortgage insurance.

The first and the more obvious option is to continue to save until you have at least a 20% deposit. This also has the benefit of qualifying you for lower interest rates, as low deposit home loans can be much more expensive. 

The second way to avoid LMI is to ask your parents or another family member to be a guarantor for your home loan, which uses a portion of their own property as security. This can help lessen your overall risk in the lender's eyes, since the guarantor effectively becomes insurance in case you can no longer make repayments. 

Tips for getting your loan approved with a low deposit

While there plenty of home loan offers that let you borrow up to 95% of a property's value, that doesn’t mean you’ll get automatically approved.

Here are a few tips to help your chances of a successful home loan application. 

1. Ditch the debt

Lenders look at your credit card and personal loan statements to see how responsible you are with your debt. They're looking for any missed payments or arrears, which red as huge home loan red flags.

Before you apply for a low deposit home loan, make sure you’ve paid off any outstanding debt, including HECS-HELP student debt, and can show the provider that you are diligent when it comes to repayments.

2. Check your credit report

If your credit report shows missed payments, too many hard enquiries, or arrears, then this will reduce your chances of being approved for a home loan because you seem like a flighty, irresponsible, or unreliable borrower.

Instead, avoid this pitfall by requesting a free credit report and checking it for any errors. If you find any, clean up your ledger and check your credit score: you'll want to aim for something in the 'good' range or higher to get a home loan. 

3. Get saving

While you may have the cash saved for a low deposit home loan, you’ll also need to show that you have genuine savings through bank and savings accounts statements. This demonstrates to the bank that you have financial buffers in times of need and that you can put away consistent amounts of your income each month.

What are the REAL costs of owning a home? Check out our guide for the fees and freebies roundup. 

Compare low deposit home loans in the table below.

Compare low deposit home loans - last updated 15 April 2024

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.

Evlin DuBose
Evlin DuBose
RG146
Senior Money Writer

Evlin, RG146 Generic Knowledge certified and a UTS Communications graduate, is a leading voice in finance news. As Mozo's go-to writer for RBA and interest rates, her work regularly features in Google's Top Stories and major publications like News.com.au.

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.