Written byLenders mortgage insurance (LMI) is a one-off premium a home loan borrower pays to insure the lender, not the borrower, against loss if the loan is not repaid.
Also known as: LMI, lenders mortgage insurance, mortgage insurance, lender's mortgage insurance
Key points
- Lenders usually require it when the loan-to-value ratio is above their limit, commonly when the deposit is less than a fifth of the price.
- It protects only the lender. Cover for your own repayments if you cannot work is a different policy, mortgage protection insurance.
- The premium is usually added to the home loan, so you pay interest on it for the life of the loan.
- A bigger deposit, a family guarantee or a place in the federal Home Guarantee Scheme are the usual ways around it.
How LMI works
A lender takes on more risk when it lends most of a property's value, because a modest fall in prices can leave the loan larger than the house is worth. LMI transfers that risk to a specialist insurer. The lender arranges the policy, the borrower pays the premium, and if the borrower later defaults and the sale proceeds do not clear the debt, the insurer makes up the difference to the lender.
The borrower gets nothing from the policy. Worse, the insurer generally has the right to recover what it paid out from the borrower, so LMI does not wipe the shortfall; it just changes who is chasing it. It is also tied to the loan, not the person: refinance to another lender and you may pay it again.
What it costs and who pays
The premium is worked out from the loan amount and the loan-to-value ratio, and it climbs steeply as the deposit shrinks: a borrower with a deposit just under the lender's line pays far less than one with a very small deposit on a large loan. Stamp duty is added to the premium in most states. Lenders quote the figure before you commit, and some publish calculators.
Most borrowers do not pay it upfront. The premium is capitalised, meaning it is added to the loan balance, which keeps the cash deposit intact but means the premium accrues interest for as long as the loan runs. A partial refund is sometimes available if the loan is repaid very early, but that is the exception.
Avoiding or reducing LMI
The straightforward route is a deposit large enough to keep the loan under the lender's threshold. Where that is out of reach, a family member can offer a limited guarantee secured against their own property, which lifts the effective security and removes the need for LMI. The government's Home Guarantee Scheme does something similar for eligible first home and other buyers, guaranteeing the top slice of the loan so no premium is charged.
Some lenders waive LMI for certain professions or for borrowers with strong equity elsewhere, and a few offer lender-paid LMI in exchange for a higher rate. Each path has its own cost, and the premium is worth comparing against the alternatives rather than treating as unavoidable.
Example
A chef in Wollongong buying her first unit has a deposit of about a tenth of the price. Her lender quotes an LMI premium that would be added to the loan, which means paying interest on it for decades and starting with less equity than she put in. Her broker checks whether she meets the Home Guarantee Scheme criteria, and whether her parents would offer a limited guarantee over part of their own home. She qualifies for the scheme, the premium disappears, and the deposit she has saved goes entirely towards the purchase.
Not to be confused with
- Loan-to-value ratio (LVR)
- the loan-to-value ratio is the measure that decides whether LMI is charged, not the insurance itself
- Insurance
- ordinary insurance covers the person who pays for it, while LMI covers the lender even though the borrower pays
Frequently asked questions
Who does LMI protect?
The lender, and only the lender. If you default and the property sells for less than the loan balance, the insurer pays the lender the difference and can then pursue you for what it paid. The premium buys you nothing except the lender's willingness to write the loan with a small deposit.
How much is LMI?
It depends on the size of the loan and how far the loan-to-value ratio sits above the lender's threshold. A slightly short deposit on a modest loan attracts a modest premium; a very small deposit on a large loan can cost tens of thousands. Lenders quote the figure before you commit, and most brokers can model it for you.
Can I avoid paying LMI?
Often, yes. A deposit that keeps the loan under the lender's threshold, a limited guarantee from a family member, a place in the Home Guarantee Scheme, or a professional waiver offered by some lenders will each remove it. Which one is realistic depends on your deposit, your income and whether family are willing and able to help.
Is LMI refundable if I refinance?
Generally not. The policy belongs to the original lender and does not follow you to a new one, so if you refinance while your loan-to-value ratio is still above the new lender's threshold you can be charged again. A small partial refund is sometimes offered if the loan is paid out within the first year or two.
Is LMI the same as mortgage protection insurance?
No, and the names cause confusion. LMI is a lender requirement when the deposit is small and protects the lender. Mortgage protection insurance is optional and pays your repayments for a period if you cannot work because of illness, injury or redundancy. One is a condition of the loan; the other is a choice you make for your own protection.
Related terms
Home loan
A home loan is a secured loan used to buy property or fund major home projects, with the lender taking a mortgage over the property as security.
Read definitionLoan-to-value ratio (LVR)
A loan-to-value ratio (LVR) is the amount you borrow as a percentage of the value of the security, usually property, and a key measure of lending risk.
Read definitionDeposit
A deposit is the upfront amount a buyer or borrower pays towards a purchase, either as part-payment on a sale contract or as cash contributed to asset finance.
Read definitionMortgage
A mortgage is the legal charge a lender registers over property to secure a loan, giving it the right to sell the property if you default.
Read definitionGuarantee
A guarantee is a contract in which a guarantor promises a creditor to pay or perform if the principal debtor defaults, supporting the debt rather than replacing it.
Read definitionRefinancing
Refinancing is replacing an existing loan with a new one, from the same or a different lender, to change the interest rate, term or features, or to release equity.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.