Many first home buyers are surprised to find they have to pay thousands of dollars for insurance that doesn’t protect them. Here’s what lenders mortgage insurance is, and how to avoid paying it.
Lenders mortgage insurance, or LMI, is a fee charged to many home buyers who borrow more than 80% of a property’s value, which means they have a deposit of less than 20%.
It’s one of the most misunderstood costs of buying a home, because although the borrower pays for it, it protects the lender.
How it works
When someone borrows a large share of a property’s value, the bank faces more risk. If the borrower can’t make repayments and the home has to be sold for less than the amount owed, the bank could lose money.
LMI covers the bank against that loss. The borrower still owes any shortfall. In some cases, the insurer can pursue the borrower to recover what it paid out.
How much it costs
LMI is usually a one-off premium paid when the loan is set up. The cost depends on the size of the loan and the deposit. The smaller the deposit, the higher the premium.
For a buyer with a 10% deposit on a typical home, LMI can cost thousands or even tens of thousands of dollars. Many lenders let borrowers add the cost to their home loan, but that means paying interest on it for the life of the loan.
LMI generally isn’t refundable if you sell or refinance soon after buying, and a new premium may apply if you switch lenders and still owe more than 80% of the property’s value.
Ways to avoid it
The simplest way is to save a deposit of 20% or more. But with high property prices, that can take many years.
The Federal Government’s 5% Deposit Scheme lets eligible first home buyers, and some others, buy with as little as 5% deposit without paying LMI, because the Government guarantees part of the loan instead. Since October 2025, it has been open to all first home buyers, with no income limits or caps on places, but property price limits still apply.
A guarantor, usually a parent, can use equity in their own home to guarantee part of the loan, which can help avoid LMI.
Some lenders waive LMI for certain professions they consider low risk, such as doctors, lawyers and accountants, up to a higher loan-to-value ratio.
Is it worth paying?
Paying LMI isn’t always a bad decision. Waiting years to save a 20% deposit can mean paying rent the whole time, and if property prices rise faster than savings, a buyer could fall further behind.
Whether it makes sense depends on the cost of LMI compared with the rent paid and the risk of prices rising while saving. A mortgage broker can help compare options.
