Unlocking Lenders Mortgage Insurance (LMI)
When you’re saving for your first home, Lenders Mortgage Insurance (LMI) is often framed as something to avoid at all costs.
But like most parts of the home buying process, LMI isn’t good or bad on its own. When your able to understand how it works, it can actually help you make clearer decisions about your deposit, your timing, and whether buying sooner makes sense for you.
In this resource, we’ll discuss:
What LMI actually is and who it protects
Why banks charge LMI when you borrow more than 80%
How LMI connects to the First Home Guarantee (5% Deposit Scheme)
The main pathways first home buyers use to avoid or reduce LMI
When paying LMI can actually be a smart, strategic decision
This resource supports Episode 24 of the First Home Unlocked Podcast: Unlocking Lender’s Mortgage Insurance.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is an insurance premium that protects the bank, not you, if you can’t repay your home loan.
If you as a borrower falls behind on your repayments and the property needs to be sold, the sale price might not be enough to clear the remaining loan, especially if the market has fallen. In that situation, the LMI provider covers the shortfall for the lender. The insurer may then seek to recover that amount from you, the borrower.
LMI is usually charged when:
You borrow more than 80% of the property’s value, and
Your deposit is less than 20%, which the bank sees as higher risk.
There are ways first home buyers can avoid LMI, which we’ll cover shortly, but understanding what it is first helps everything else make sense.
How Much LMI Costs
One confusing part of LMI is that there’s no single LMI rate across the industry. How much you pay depends on multiple factors, including:
Your Loan to Value Ratio (LVR)
Your total loan size
Whether the property is owner-occupied or an investment
Which lender you choose and which insurer they use
Two lenders can charge very different LMI premiums for the exact same purchase, simply because their pricing models and insurer agreements are different.
As a rough example, on an $800,000 purchase with a 10% deposit in NSW, LMI at the major banks can currently range from around $14,000 to $18,000.
In most cases, LMI is:
Added to your loan balance
Not paid upfront
Financed over the life of the loan
Charged interest along the way
Because it increases your total loan amount, it also affects:
Your borrowing capacity
The interest rate you’re offered
And therefore your monthly repayments
The Main Pathways to Avoid or Reduce LMI
For first home buyers today, there are a few key ways LMI can be avoided or reduced.
1. The First Home Guarantee (5% Deposit Scheme)
This is the most common pathway we see. Under the First Home Guarantee:
You can buy with as little as a 5% deposit
You pay no LMI
The government guarantees up to 15% of the property’s value
The bank treats your loan as if it were 80% LVR
Last financial year, around 1 in 3 first home buyers used this scheme. With recent changes like higher price caps and removed income caps, we’re likely to see even more buyers using it. That said, it’s not always the right fit if the price caps or property rules don’t align with your asset quality or lifestyle goals.
2. LMI Waivers for Certain Professions
Some lenders offer LMI waivers for professions they see as lower risk, such as:
Medical and allied health roles
Accounting and law
Education
Some frontline professions
These waivers usually apply up to 90% LVR, meaning you need a minimum 10% deposit.
Each lender has different rules. Some require specific job titles, registrations, or memberships. And importantly, interest rates can vary, even when LMI is waived.
Sometimes a waiver looks great on paper, but when you factor in higher rates or stricter policy, it’s not always the best overall outcome. This is where comparing the full picture really matters.
3. New No-LMI Bank Policies
We’re also starting to see some lenders offering 90% LVR loans with no LMI, regardless of profession. These products can be appealing, but they often come with:
Stricter living expense assessments
Lower borrowing capacity
More documentation requirements
In some cases, a loan with LMI at another lender can actually give you more borrowing power and a lower rate, even after the LMI is added.
4. Family Guarantor Loans
A family guarantor loan allows a parent or family member to use equity in their own property as additional security.
This can:
Help you avoid LMI
Reduce the deposit required
Get you into the market sooner
It’s a powerful option, but it comes with responsibility for the guarantor and needs to be structured carefully. Most guarantees can be removed later once your LVR improves.
When Paying LMI Can Actually Make Sense
Not everyone qualifies for LMI waivers or government schemes. And that’s where this conversation really matters. There are many situations where paying LMI is a strategic choice.
Paying LMI can make sense when:
It helps you buy sooner, rather than waiting years to save a larger deposit
You’re purchasing a high-quality asset with strong long-term fundamentals
Market growth may outpace the cost of LMI
Keeping a cash buffer matters more than hitting a 20% deposit
We often see buyers who stretch to avoid LMI end up:
Buying a lower-quality property
Using all their savings at settlement
Having no buffer when life changes
In many cases, the peace of mind that comes from having cash in reserve is far more valuable than avoiding LMI altogether.
How LMI Is Tiered
LMI isn’t a flat fee. It increases as your deposit decreases. Using an $800,000 purchase as an example, if you had a:
20% deposit ($160,000) → No LMI
15% deposit ($120,000) → ~$7,000–$9,000
12% deposit ($96,000) → ~$9,000–$12,000
10% deposit ($80,000) → ~$14,000–$18,000
8% deposit ($64,000) → ~$22,000–$27,000
This is why many buyers aim for a 12–15% deposit if they’re paying LMI. It often sits in a sweet spot where:
LMI is still manageable
Borrowing power remains strong
You’re not delaying your purchase unnecessarily
Final Thoughts: Don’t Treat LMI as the Enemy
Lenders Mortgage Insurance isn’t something to try and fully avoid or fully accept. It’s a cost. And like every cost in property, it needs to be weighed against:
Time
Opportunity
Asset quality
Cash buffers
Your broader life plans
For some buyers, avoiding LMI makes perfect sense. For others, paying it is the thing that helps them buy sooner, buy better, and feel more secure once they do.
The key is understanding all your options and choosing the pathway that supports your long-term goals, not just the one that sounds best on paper.
If you’d like help mapping out your deposit strategy, comparing LMI options, or understanding what makes sense in your situation, you can book a Get to Know You Chat with us.
And for the full conversation, examples, and scenarios, listen to Episode 24 of First Home Unlocked.
