From conveyancing to stamp duty, there are plenty of ancillary expenses to keep in mind when you’re becoming a homeowner – but a key concept you should get to grips with before you start house hunting is lenders mortgage insurance, which is more commonly known as LMI.
LMI can be a double-edged sword for homebuyers. While being required to take it out can help you purchase a property sooner even with a smaller saved deposit, you will pay a premium for the privilege, which can be in the thousands of dollars.
Let’s take a look at LMI, how it works, who has to pay it and more.
Not sure whether you'll have to pay lenders mortgage insurance (LMI) or not? Selling Houses Australia host, Andrew Winter, has some LMI tips for future homebuyers.
LMI is a type of insurance charged by lenders to homebuyers taking out home loans with a loan-to-value ratio (LVR) of more than 80% (meaning their initial home loan deposit is less than 20% of the property value).
Lenders typically view a higher LVR as indicative of higher risk, so an LMI policy provides the lender with a degree of financial protection in line with the perceived risk of lending you money.
LMI is designed to protect the lender against the losses they could incur if you default on your home loan repayments. It does not protect you, the borrower, and it cannot be transferred from one lender to another – meaning if you refinance or switch lenders with an LVR higher than 80%, you may have to pay LMI in full all over again.
It’s worth noting that your saved deposit will usually be required to cover the various upfront costs associated with buying a house, including stamp duty and conveyancing fees. So, when you’re calculating your homebuying costs and the size of your deposit relative to the size of your home loan, be sure to factor in those upfront costs.
The lender will calculate your LVR and determine whether or not you will be required to take out LMI as part of the home loan application process. Your LVR and whether you’ll need LMI may be a factor in the lender’s decision to approve or deny your home loan application.
If you do get approved for a home loan on the condition that you pay LMI, there are a couple of ways you can do so, including:
The decision to pay your LMI upfront or capitalise it into your home loan is one you’ll have to make with the help of your lender or broker based on your financial circumstances. You may want to talk to a one of our lending specialists or a financial advisor, as they’ll be able to help you determine which option may be more advantageous in terms of minimising your home loan repayments and total home loan costs.
Depending on your lender, you may not be offered a choice when it comes to how you pay your LMI. Some may only offer one option or the other, although different lenders now offer different options for managing the cost of LMI. For example, some only charge nominal amounts for LMI (e.g. only charging $1 in LMI fees for eligible applicants).
If you suspect you may end up having to pay LMI based on the current size of your deposit, you may want to explore your LMI payment options by talking to our Home Loan Specialist team. However, it may be better to prioritise value and cost when comparing lenders and home loan products, rather than things like LMI payment options which are ultimately auxiliary features.
There’s no one-size-fits-all answer for how much LMI costs, as several factors will determine the ultimate size of your LMI bill. Generally, the size of your deposit and how much is being borrowed will have the greatest impact on your eventual LMI premium.
The table below demonstrates the upfront LMI premiums you could end up paying based on different deposit and home loan sizes.
| Deposit size | |||
| Property value | 5% | 10% | 15% |
| $500,000 | $ 14,871.82 | $ 8,679.89 | $ 4,712.67 |
| $700,000 | $ 27,946.62 | $ 15,498.00 | $ 7,540.27 |
| $1,000,000 | $ 39,923.75 | $ 22,140.00 | $ 10,771.82 |
| Assumptions: Calculated via Helia’s LMI fee estimator. Assumes buyer is a first home buyer with a 30-year owner-occupied home loan. Fees subject to change, guide only. LMI costs can also vary by state. Assumes an upfront LMI premium. Excludes stamp duty. | |||
Factors that may impact the price of your LMI include:
If you’d prefer not to pay LMI, there are a range of options available to homebuyers looking to avoid or minimise their LMI. These include:
In most cases, LMI is non-refundable; however, you may be entitled to a partial refund in certain circumstances. For example, LMI premiums may be partially refunded if the risk decreases and the home loan is repaid within the first one to two years, with all repayments having been made on time.
Any partial refund will be at the discretion of the lenders.
It’s a good idea to chat to our home loan expert or lender and read the home loan key fact sheets before taking out a loan, to make sure you’re aware of the terms and conditions regarding LMI.
When it comes to paying LMI on a home loan, the same rules generally apply to refinancing. If you don’t have 20% of the home’s value in the form of cash or existing equity, you may have to pay LMI.
LMI can’t be transferred from one lender to another, and you may find yourself paying more in LMI on your new home loan if your LVR ends up being higher. To avoid this, it’s sometimes better to wait until you’ve built up enough equity in your home to ensure your new home loan will have an LVR of 80% or less.
No, LMI isn’t the same as mortgage protection insurance (MPI). LMI is protection for the lender if you can’t pay your loan back, whereas MPI is a type of income protection insurance which can protect the borrower (you) against unexpected events such as involuntary redundancy, disability or death.
In the case of such an event and if you meet the criteria, your MPI provider will compensate (you in the form of either a lump sum or ongoing payments to help you cover your regular home loan repayments.
LMI in Australia is arranged by the lender, and they will generally use a provider such as QBE or Helia. They may even self-insure.
LMI reduces the risk you pose to your lender, but it can also benefit you as a borrower. For example, it may help you enter the property market earlier with a smaller deposit, sometimes as small as 5%.
This opens up a wide range of options for you, including:
Of course, this can also come with risks; you’re borrowing more, so your mortgage repayments will be higher as a result, meaning an interest rate increase could put you under mortgage stress.
So, while LMI can help you enter the property market sooner, you’ll need to think long and hard about whether you’re comfortable signing up for larger home loan repayments and higher risk.
The only similarity between LMI and stamp duty is that they can both be paid as an upfront homebuying cost. Stamp duty is a mandatory tax imposed by state and territory governments on the transferral of a property’s legal title from one party to another as the result of a sale, whereas LMI is a lender-imposed premium that not all borrowers will have to pay.
Stamp duty on a property can also be thousands, if not tens of thousands, of dollars. Unlike LMI, however, it’s not determined by your deposit size, but rather:
It’s important to stress that the answer to this question will depend on whether you choose to pay your LMI upfront or to capitalise it into your home loan. If you choose to pay it upfront, you won’t pay it monthly (because it’ll already be paid for).
However, if your lender will let you capitalise your LMI into your home loan, you’ll be paying it off via your regular home loan repayments, which could be monthly depending on the repayment frequency you and your lender have agreed on.
Lenders will generally give you the option of making weekly, fortnightly or monthly repayments, and the repayment frequency you choose will determine how you’re repaying your LMI.
LMI (if required), along with stamp duty, will typically be by far the largest upfront expenses associated with buying a home (if you choose to pay your LMI upfront). But there are a few others to be aware of that can really add up, including:
If you want to buy a home now and don’t have a 20% deposit, you’ll most likely have to pay LMI, regardless of whether you think you ‘need’ it or not.
So, strictly speaking, no one ‘needs’ LMI – but some borrowers may decide it’s worth taking out based on their specific borrowing circumstances, and some may decide it’s not.
Consider two different prospective homebuyers:
Jamie may decide that LMI is a cost he’s willing to bear, as the money he’ll spend on LMI is dwarfed by the money he’d put towards paying rent in the time it would take him to save a larger deposit.
Trudy may decide she doesn’t want to have to pay LMI and is happy to continue living with her parents while she works towards saving up a larger deposit.
Whether you decide to spend time saving a larger deposit or commit to borrowing with a higher LVR and paying LMI, your decision should be decided based on your personal circumstances, goals, and timeframes.
The table below demonstrates the LMI costs you might incur at different deposit sizes based on the median dwelling values of state and territory capital cities around the country.
| Capital City | Median value | With a 5% deposit | With a 10% deposit | With a 15% deposit |
| Melbourne | $747,322 | $33,143.64 | $18,363.23 | $8,937.89 |
| Sydney | $1,014,393 | $44,988.21 | $24,925.71 | $12,132.02 |
| Brisbane | $698,071 | $30,959.37 | $17,153.03 | $8,348.85 |
| Adelaide | $645,721 | $28,637.65 | $15,866.68 | $7,722.75 |
| Perth | $567,111 | $25,151.31 | $13,935.08 | $5,929.15 |
| Hobart | $650,689 | $28,857.98 | $15,988.76 | $7,782.16 |
| Canberra | $828,175 | $36,729.47 | $20,349.95 | $9,904.88 |
| Darwin | $492,465 | $16,260.69 | $9,498.98 | $5,148.73 |
| National average | $704,723 | $31,254.38 | $17,316.49 | $8,428.41 |
| Figures based on Helia’s LMI calculator. Assumes a 30-year loan term, owner-occupier mortgage for a non-first home buyer. Dwelling price data via CoreLogic.¹ | ||||
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.
Depending on their financial situation, even borrowers with smaller deposits may be able to get on the property ladder by paying LMI. Some however, may view LMI as an avoid-at-all-costs expense that’s worth delaying home ownership for in order to not pay it.
Regardless of your stance on LMI, you’ll want to make sure you end up with a great-value home loan. Comparing a wide range of loan options is a great way to get some perspective on the market, and figure out what might be best for you.
At the end of the day, it pays to compare, so start your search today by comparing home loans with us. Simples!
¹ CoreLogic Home Value Index, April 2023.
