Understanding Lenders Mortgage Insurance (LMI) — A Complete Guide

Overview

Lenders Mortgage Insurance (LMI) is a one‑off insurance premium that protects the lender — not the borrower — if a home loan goes into default and the property sale does not fully cover the outstanding balance. While terminology and providers vary by country, the concept is broadly similar worldwide.

When is LMI required?

Most lenders require LMI when your Loan‑to‑Value Ratio (LVR) exceeds a threshold — commonly 80%. LVR is:

LVR = (Loan Amount ÷ Property Value) × 100

Examples where LMI may apply:

• You have less than a 20% deposit.
• You are borrowing against a newly appraised property value after a small deposit.
• You are an investor with a small down payment.

Some lenders offer LMI waivers for specific borrower profiles (e.g., certain professions) or time‑limited promotions. Eligibility depends on the lender and insurer.

How are LMI premiums calculated?

Although rate tables differ by country and provider, premiums typically increase with higher LVRs and larger loan amounts. Common drivers include:

• LVR bands (e.g., 80–85%, 85–90%, 90–95%).
• Borrower type (owner‑occupier vs investor).
• Property type (house, apartment, land, construction).
• Discounts (e.g., first‑home buyer concessions) where available.

The premium can be paid upfront at settlement or capitalised (added to your loan). Capitalising increases the principal, which means you pay interest on the LMI as well.

Capitalising LMI — cost impact

Capitalising LMI increases:

• Your monthly repayment (because the loan balance is higher), and
• Your total interest over the life of the loan.

For example, adding a 3,000 premium to a 300,000 loan at 6% interest over 30 years increases repayments and total interest materially. The exact impact depends on your local rates and terms — use the calculator below to model your case.

Avoiding or reducing LMI

• Save a larger deposit to keep LVR at or below the threshold (often 80%).
• Consider lender policies that waive or reduce LMI for certain professions.
• Contribute windfalls (bonuses, gifts) toward the deposit to reduce LVR.
• Reassess property selection or timing to align with deposit targets.

Key pros and cons

Pros

• Enables earlier entry to the property market with a smaller deposit.
• May allow purchase in areas where prices are rising faster than you can save.

Cons

• Adds a large, non‑recoverable cost (the premium protects the lender).
• If capitalised, increases repayments and total interest.

Frequently asked questions

Is LMI the same as mortgage protection insurance?

No. Mortgage protection (or payment protection) covers the borrower for events like illness or job loss. LMI protects the lender if the borrower defaults.

Can I refund LMI if I refinance soon after?

Generally no. Some providers offer partial refunds within a short window, but most premiums are non‑refundable. Check your local provider's terms.

Does LMI approval guarantee loan approval?

No. LMI approval is separate from lender credit approval, though the insurer's assessment often mirrors the lender's risk view.

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Use our interactive tool to estimate premiums and see the effect of capitalising LMI on repayments and total interest.

Try the LMI Calculator to model your scenario in seconds.

Sources

• ASIC Moneysmart — LMI: https://moneysmart.gov.au
• APRA — Prudential standards (mortgage lending context): https://www.apra.gov.au