The costs of buying a home in Australia has been a source of a lot of public debate in recent years. It can be difficult enough saving for a deposit but you also need to factor in some other less-well-known potential fees when you’re planning to buy a house. Once such charge is Lender’s Mortgage Insurance, frequently abbreviated to LMI. But there are scenarios where you may not need to incur this cost. So let’s take a look at Lender’s Mortgage Insurance and how you might be able to avoid paying it.

When you're buying a home in Australia, especially with a smaller deposit, the term Lender’s Mortgage Insurance (LMI) will likely come up. It’s a cost that can add thousands to your mortgage but if you understand how it works, who might be exempt and what triggers it you may be able to avoid paying it altogether. If you're looking to make informed home buying decisions, this guide is for you.

What Is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender (not the borrower) if you default on your home loan repayments. It is usually required when the mortgage you are applying for is 80% or more of the property’s value or put more simply when your deposit is less than 20% of the property’s purchase price. This is referred to as your Loan to Value Ratio (LVR) and when this is 80% or more, you are generally seen as higher risk to banks and lenders. The more you can do to reduce your LVR the lower your perceived risk will be to a bank or lender. 

Importantly, LMI does not protect you as the borrower. It simply reduces the risk for lenders when approving home loans with smaller deposits.

Is LMI The Same As Mortgage Protection Insurance?

No - these two products are commonly confused but Mortgage Protection Insurance is designed to protect you - the borrower - should you not be able to meet your home loan repayments in the event of illness, injury or unemployment.  Lenders Mortgage Insurance protects the banks and lenders.  

Is LMI Paid Upfront?

While you do have the option to pay LMI as a one-off lump sum upfront at the start of your mortgage, borrowers usually also have the option to capitalise the cost of LMI into the loan amount. This means you can add the LMI premium to your mortgage and pay it off over time as part of your regular loan repayments.

There are pros and cons to both options - paying it upfront means you avoid ongoing interest on the LMI premium but adding it to your loan allows you to spread the cost of it, reducing the initial financial stress.

Is LMI a One-Off Payment?

Yes, if you choose to pay off the premium upfront at the time of settlement Lenders Mortgage Insurance will be a one-off payment. It doesn’t need to be renewed annually like other types of insurance. However, if you refinance your home loan or purchase a new property without increasing your deposit to 20%, you may need to pay LMI again.

How Much Does Lenders Mortgage Insurance Cost?

The cost of LMI varies based on:

• The size of your deposit
• The total loan amount
• The lender’s specific insurance provider
• Whether you're a first home buyer

As a rough guide, LMI can cost anywhere between 0.5% to 4% of the loan amount. For example, on a $600,000 loan with a 10% deposit, you could be looking at an LMI premium of around $10,000 to $15,000.

An experienced mortgage broker can help you determine these figures more accurately as they have a deep understanding of the products and lenders and how they usually operate.

How to Avoid LMI

The good news is that it is possible to avoid LMI in some scenarios and it can save you thousands of dollars. Here are some of the most effective ways to avoid it:

1. Save a Larger Deposit

The most straightforward way to avoid LMI is to save at least 20% of the property’s purchase price. This keeps your LVR at or below 80%, which is the usual threshold for lenders to waive LMI.

2. Use a Guarantor

If a family member is willing to act as a guarantor by using the equity in their home as security, lenders may waive the LMI requirement. The equity would need to cover the 20% deposit.

3. Apply for an LMI Waiver

Certain professions may be eligible for an LMI waiver. This includes doctors, lawyers, accountants and other professionals with stable, high-income careers. Lenders may offer these borrowers up to 90% or even 95% LVR without charging LMI.

4. First Home Guarantee Scheme

Under the First Home Guarantee Scheme, eligible first home buyers can purchase a property with a deposit as low as 5% without paying LMI. The government guarantees the remaining amount to the lender.

5. Shop Around and Compare Lenders

It’s worth shopping around to see if there are any lenders currently offering discounts or promotions to reduce your LMI. THis is where a mortgage broker can really help as they will do the legwork for you and find the best deals available at the time.

How Much Deposit Do You Need to Avoid LMI?

To avoid paying LMI, you’ll typically need a deposit of at least 20% of the property’s value. On a $700,000 property, that equates to a $140,000 deposit. If you’re applying for a loan with a deposit lower than this, be prepared to pay LMI unless you qualify for a waiver or scheme.

What Is an LMI Waiver and Who Can Apply?

An LMI waiver means the lender chooses to waive the LMI requirement, usually for low-risk borrowers. These are often professionals in fields such as:

• Medical (Doctors, Dentists, Pharmacists)
• Legal (Solicitors, Barristers)
• Accounting and Finance
• Engineering and Architecture

Each lender has its own eligibility criteria, but common requirements include a minimum income threshold, permanent employment status, and clean credit history.

Final Thoughts

While Lenders Mortgage Insurance can be a significant cost, it also opens the door to home ownership for those who don’t yet have a 20% deposit. However, if your goal is to reduce upfront costs, it’s worth exploring ways to avoid LMI through increased savings, using a guarantor, or applying for an LMI waiver.

At Sapphire Finance Brokerage, we specialise in helping clients understand their options and structure home loans that meet both their short-term needs and long-term goals. If you want to know more about LMI or need advice on how to avoid LMI, get in touch with our expert brokers today.