Lenders Mortgage Insurance

Plain-English definition. Lenders Mortgage Insurance (LMI) is a one-off insurance premium paid by the borrower that protects the lender (not the borrower) against loss if the borrower defaults and the sale of the property doesn't recover the loan balance. It applies when borrowing above 80% LVR.

How it works in Australia. LMI is underwritten by two main insurers — Helia (formerly Genworth Australia) and QBE LMI — and a few in-house lender programs. The premium is a function of loan size and LVR; it climbs steeply as LVR rises. Most lenders allow you to "capitalise" the premium (add it to the loan balance), meaning you pay interest on it for the loan term. LMI is non-transferable: refinance to another lender and you generally pay LMI again if still above 80% LVR. Exemptions exist for certain professionals (doctors, lawyers, accountants — up to 90% LVR LMI-free at most banks), and for buyers using the Home Guarantee Scheme.

Concrete example. A first home buyer borrows $665,000 against a $700,000 purchase — 95% LVR. LMI premium is approximately $26,000 (about 4% of the loan). Capitalised, the new loan balance is $691,000 at 95.4% LVR. At 6.2% over 30 years, that capitalised LMI costs an additional $32,500 in interest over the life of the loan.

Common confusion. LMI does not protect the borrower — if you default and the bank recovers a shortfall from LMI, the insurer can then pursue you for that shortfall. It's lender insurance you pay for. Also: LMI varies wildly between lenders for the same scenario — shop around or use a broker.