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First Home Buyers

What Is LMI?

What is lenders mortgage insurance (LMI) and when do I have to pay it?

By Andrew, franklenn FINANCE 6 min readUpdated 3 November 2026

The short answer

Lenders mortgage insurance (LMI) is a one-off insurance premium that protects the lender, not you, if you cannot repay your loan and the property sells for less than you owe. You usually pay it when you borrow more than 80% of the property's value. The cost depends on your loan size and loan to value ratio, and it is often added to the loan. You may avoid it with a 20% deposit, a government scheme, a family guarantee or a professional LMI waiver.

Detailed explanation

How LMI works

When you borrow more than 80% of a property's value, the lender takes on more risk. LMI covers the lender if you default and selling the property does not cover the debt. Even though you pay the premium, it does not protect you. If you default, you can still be chased for any shortfall.

LMI is usually a single upfront payment. Most borrowers add it to their loan amount (called capitalising), which means paying interest on it over the life of the loan.

Capitalising LMI pushes your LVR slightly higher than your deposit alone suggests. Most lenders set a maximum LVR including LMI, so a buyer with exactly 5% saved may find the capitalised premium takes them over the lender's limit. We check this before you apply.

How much LMI costs

The premium depends mainly on two things: your loan to value ratio (LVR) and the size of your loan. The higher each one is, the higher the premium. A loan at 95% LVR costs much more to insure than one at 85%.

Premiums also vary between lenders and insurers, and some states charge stamp duty on the premium. Use an LMI calculator for an estimate, and remember the lender's figure is the one that counts.

Because premiums rise in steps as LVR increases, a small change to your deposit can sometimes make a noticeable difference. For example, adding a few thousand dollars to move from just over 90% LVR to just under it may reduce the premium by more than the extra deposit.

Ways to avoid or reduce LMI

LMI is not always a bad thing. For some buyers, paying it to buy years sooner makes financial sense. But it is worth knowing the alternatives.

  • Save a 20% deposit, so your LVR is 80% or less
  • Use the federal 5% Deposit Scheme if eligible (expanded from 1 October 2025, with no income caps and higher price caps)
  • Ask about a family guarantee, where a parent's property equity provides extra security
  • Check if your profession qualifies for an LMI waiver, which some lenders offer to medical, legal and accounting professionals
  • Aim for a lower LVR band, as even dropping from 95% to 90% can cut the premium noticeably

Is LMI refundable?

Generally, no. Once your loan settles, the premium is rarely refunded, even if you sell or refinance soon after. If you refinance to a new lender while your LVR is still above 80%, you may have to pay LMI again.

That is why it is worth thinking about your plans for the next few years before you choose a lender with LMI involved.

Paying LMI is not a sign you have done something wrong. For many buyers it is a practical way to get into the market sooner, and the cost can be worth it if property values rise or rent savings add up. The key is to understand the real cost before you decide.

Worked example

Adding LMI to a loan on a $705,000 home

Here is an illustrative example of a buyer with a 10% deposit on a $705,000 home who adds LMI to the loan. The LMI premium is illustrative only. Rate used: 5.89% p.a. over 30 years, principal and interest.

Purchase price$705,000
10% deposit$70,500
Base loan (90% LVR)$634,500
Illustrative LMI premium (capitalised)$14,870
Total loan including LMI$649,370 (about 92.1% LVR)
Monthly repayment without LMI / with LMI$3,759.39 / $3,847.50
Extra repaid over 30 years due to capitalised LMIAbout $31,718

Adding $14,870 of LMI raises repayments by about $88 a month and costs around $31,718 in total over 30 years, once interest is included. That is a real cost, but this buyer might decide it is worth it to buy now rather than save another $70,500 to reach 20%.

Illustrative only. Figures are examples, not a quote or a recommendation.

Common mistakes

  • Thinking LMI protects you as the borrower
  • Not checking eligibility for the 5% Deposit Scheme, a family guarantee or a professional waiver
  • Forgetting that capitalised LMI attracts interest for the life of the loan
  • Refinancing soon after buying and paying LMI a second time
  • Assuming every lender charges the same premium

Frequently asked questions

Next steps

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Wondering whether paying LMI makes sense for you, or if you can avoid it? Book a free discovery call with franklenn FINANCE and we will run the numbers with you.

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This guide is general information only and does not consider your objectives, financial situation or needs. It is not financial, tax or legal advice. Lender policies, rates and government schemes change. Please speak with us, and with your accountant or solicitor where relevant, before acting.

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