LMI vs Higher Interest Rate: Which Costs More?

The real comparison

Buyers often ask whether LMI is worth paying.

The better question is: what is the total cost of each option?

Sometimes paying LMI to buy earlier is cheaper than waiting years for a 20% deposit. Sometimes accepting a higher interest rate to avoid LMI costs more over time. Sometimes the cheapest answer is to buy a cheaper property.

The three costs to compare

When comparing LMI against a higher rate, look at:

1. The upfront LMI premium.
2. The extra interest if LMI is added to the loan.
3. The ongoing cost of any higher interest rate.

A small rate difference can become expensive over a long loan term.

Example

Assume a buyer is comparing two options:

• Option A: Pay LMI and get a lower rate.
• Option B: Avoid LMI but accept a higher rate.

If the higher rate is 0.20% more on a $700,000 loan, that can be roughly $1,400 a year in extra interest before allowing for principal reduction.

Over several years, that gap can outweigh a smaller LMI premium. But if the LMI premium is large and the rate gap is tiny, the answer can flip.

Why time horizon matters

If you plan to refinance soon, the upfront LMI cost matters more.

If you plan to hold the loan for many years, the ongoing rate matters more.

This is why a cashback or no-LMI offer is not automatically a better deal. A loan with a higher rate and limited offset access can quietly cost more than it appears.

Include offset and extra repayments

A lower interest rate is not everything.

If one loan has a full offset account and the other does not, compare the value of the offset. A borrower with $50,000 in offset may save more than the visible rate difference suggests.

The same applies to extra repayments. If the higher-rate loan is more flexible and you will aggressively reduce the balance, the outcome may differ.

Bottom line

Do not compare LMI against interest rate by instinct. Model both.

Use the LMI Calculator to estimate the premium, then put both loan options into the Loan Comparison Calculator. For repayment impact, use the Mortgage Repayment Calculator.

Sources: ASIC MoneySmart guidance on lenders mortgage insurance, home loans and switching home loans. This article is general information, not personal credit or financial advice.