Lenders Mortgage Insurance: The Complete Guide

Lenders Mortgage Insurance (LMI) is one of the largest upfront costs many homebuyers face, potentially adding tens of thousands of dollars to your loan. Understanding LMI—and knowing how to avoid or minimize it—can save you significant money.

What Is Lenders Mortgage Insurance?

The Basic Definition

LMI is insurance that protects the lender (not you) if you default on your loan and the property sale doesn't cover the outstanding debt. Despite protecting the lender, you pay the premium.

Why It Exists

When you borrow more than 80% of a property's value:

• The lender faces higher risk
• If you default and they sell, they might not recover full debt
• LMI covers this potential shortfall
• It enables lending that might not otherwise happen

Who It Protects

Common Misconception: Many borrowers think LMI protects them.

Reality:

• LMI protects the LENDER only
• If you default, you're still liable for any shortfall
• The LMI provider pays the lender, then pursues you
• You get no direct benefit from the policy

How LMI Is Calculated

The Key Factors

1. Loan-to-Value Ratio (LVR) The primary driver of LMI cost:

• 85% LVR: Lower premium
• 90% LVR: Medium premium
• 95% LVR: Highest premium

2. Loan Amount Premium is calculated on loan size:

• $300,000 loan = lower premium than $600,000 loan
• Even at same LVR percentage

3. Loan Type Some loans attract higher premiums:

• Investment loans vs. owner-occupied
• Interest-only vs. principal and interest
• First home buyer vs. subsequent buyer

4. LMI Provider Different insurers have different pricing:

• Major providers: Genworth, QBE
• Some lenders self-insure
• Rates can vary significantly

Example Premium Calculations

Property Value: $600,000

Note: These are indicative only. Actual premiums vary by lender and insurer.

The LVR Cliff Edge

LMI premiums don't increase linearly—they jump at certain thresholds:

• 80.01% LVR: LMI applies (even tiny amount over triggers it)
• 85% LVR: Significant premium
• 90% LVR: Major jump in premium
• 95% LVR: Near maximum premium

Payment Options for LMI

Option 1: Capitalize Into Loan

How It Works:

• LMI premium added to your loan balance
• You pay interest on LMI over loan term
• No upfront cash required

Example:

• LMI premium: $15,000
• Interest over 30 years at 6.5%: ~$34,000
• Total cost: ~$49,000

Pros:

• No upfront payment needed
• Keeps cash available for other costs

Cons:

• Significantly increases total cost
• Increases your LVR further (ironic!)
• Paying interest on insurance

Option 2: Pay Upfront

How It Works:

• Pay LMI premium at settlement
• No interest charged
• Premium is your total cost

Pros:

• Lowest total cost
• Don't pay interest on LMI
• Lower ongoing loan balance

Cons:

• Need additional cash at settlement
• Reduces funds for other needs

Which Is Better?

If you can afford to pay upfront, it's mathematically better. But:

• Don't deplete emergency funds
• Consider if that cash could earn more invested
• Balance against other financial priorities

When LMI Applies

Standard LMI Thresholds

Most Lenders:

• LVR > 80%: LMI required
• LVR ≤ 80%: No LMI

Some Lenders:

• May allow 85% without LMI for certain professionals
• May have different thresholds for different products

How LVR Is Calculated

Basic Formula: LVR = (Loan Amount ÷ Property Value) × 100

Property Value:

• Lower of: Purchase price OR valuation
• Bank valuation may differ from purchase price
• This can unexpectedly push you over 80%

Loan Amount:

• Borrowed amount
• Plus any capitalized LMI
• Plus any capitalized fees

Strategies to Avoid LMI

Strategy 1: Save a 20% Deposit

The Straightforward Approach:

• No LMI at 80% LVR or below
• Requires discipline and time
• May mean waiting longer to buy

Acceleration Tips:

• First Home Super Saver Scheme (FHSSS)
• Government co-contribution schemes
• Side income dedicated to deposit
• Reduce expenses aggressively

Strategy 2: Family Guarantee

How It Works:

• Family member uses their property as additional security
• Allows borrowing up to 100% with no LMI
• Family member doesn't give you cash
• Their property is at risk if you default

Considerations:

• Serious decision for family member
• Should get independent legal advice
• Exit strategy when equity builds
• Not all lenders offer this

Strategy 3: Government Schemes

Family Home Guarantee (Single Parents):

• 2% deposit, no LMI
• For single parents with dependents
• Limited places available
• Income caps apply

First Home Guarantee:

• 5% deposit, no LMI
• For first home buyers
• Price caps apply
• Income limits apply

Regional First Home Buyer Guarantee:

• 5% deposit for regional purchases
• Additional benefits may apply
• Check current eligibility

Strategy 4: Professional Packages

Some Lenders Offer:

• LMI waiver for certain professionals
• Doctors, lawyers, accountants, etc.
• May allow 85-90% LVR without LMI
• Subject to criteria and policy

Typical Qualifying Professions:

• Medical professionals
• Legal professionals
• Accountants (CPA/CA)
• Engineers
• Mining/resources professionals
• Veterinarians

Strategy 5: Negotiate Property Price

Small Price Reduction = LMI Avoidance:

Example:

• Purchase price: $612,500
• Your deposit: $122,500 (20%)
• Loan required: $490,000
• LVR: 80.0% - No LMI!

vs.

• Purchase price: $625,000
• Your deposit: $122,500 (19.6%)
• Loan required: $502,500
• LVR: 80.4% - LMI required (~$4,000)

Negotiating $12,500 off the price saved $4,000+ in LMI

Strategy 6: Buy Cheaper Property First

Consider:

• Starting with more affordable property
• Building equity before upgrading
• Using equity as deposit for next purchase
• Avoiding LMI on both purchases

Strategies to Minimize LMI

If You Can't Avoid It Entirely:

Strategy 1: Maximize Your Deposit Every percentage point matters:

• 90% vs. 89% LVR can mean $1,000+ difference
• Push to hit lower LVR tier if close
• Time purchase with expected funds (tax return, bonus)

Strategy 2: Compare LMI Providers Different lenders use different insurers:

• Premiums can vary 10-20%
• Same property, same LVR, different cost
• Ask about LMI provider when comparing loans

Strategy 3: Consider Loan Type

• Owner-occupied has lower LMI than investment
• P&I has lower LMI than interest-only
• First home buyer may have different rates
• Structure loan to minimize premium

Strategy 4: Pay Upfront If Possible

• Avoid paying interest on LMI
• Total cost is just the premium
• Significant long-term savings

LMI Refunds: Can You Get Money Back?

Partial Refunds May Be Available If:

You Refinance or Discharge Early:

• Some policies allow partial refunds
• Typically within first 2-3 years
• Sliding scale based on time elapsed
• Must specifically request

Your LVR Drops Below 80%:

• Property value increases
• Loan balance decreases
• LMI no longer required
• Refund may be available

How to Claim

1. Contact your lender (not insurer directly)
2. Request LMI refund assessment
3. Provide updated valuation if required
4. Refund processed if eligible

Note: Refunds are not automatic and amounts are typically small. Don't count on this.

LMI Myths Debunked

Myth 1: "LMI Protects Me If I Can't Pay"

Reality: LMI protects the lender. If you default, the insurer pays the lender, then pursues you for the debt.

Myth 2: "I Can Shop Around for LMI"

Reality: Your lender chooses the LMI provider. You can choose a lender with cheaper LMI, but can't usually select the insurer directly.

Myth 3: "LMI Is Tax Deductible for My Home"

Reality: LMI on your primary residence is NOT tax deductible. LMI on investment property may be (spread over 5 years or loan term).

Myth 4: "Small Deposit Differences Don't Matter"

Reality: Moving from 90% to 89% LVR can save thousands. Even 0.5% LVR improvement can cross a tier threshold.

Myth 5: "LMI Transfers If I Refinance"

Reality: LMI does NOT transfer. If you refinance with LVR > 80%, you pay LMI again with the new lender.

LMI in Different Scenarios

Investment Property LMI

Key Differences:

• Premiums are higher than owner-occupied
• Often 20-30% more expensive
• Reflects higher perceived risk
• Interest-only makes it even higher

Construction Loans and LMI

Considerations:

• LMI calculated on final loan amount
• Land value + construction cost = property value
• Progressive drawdowns don't change LMI
• May be capitalized differently

Buying Off-the-Plan

Timing Issues:

• LMI based on valuation at settlement
• Property values can change during construction
• May need larger deposit if value drops
• Plan for contingency

Making Your LMI Decision

The Key Trade-Offs

Paying LMI Allows You To:

• Buy sooner with smaller deposit
• Enter market before further price rises
• Stop paying rent sooner
• Start building equity earlier

Avoiding LMI Means:

• Saving longer for larger deposit
• Lower overall loan costs
• More equity from day one
• Potentially missing market gains

The Right Decision Depends On:

• Your financial situation
• Local property market conditions
• Your timeline and goals
• Available government assistance
• Your risk tolerance

Getting Help with LMI

Understanding LMI and finding ways to minimize or avoid it is complex. The right strategy depends on your specific circumstances.

At Ding Financial, we help you:

• Calculate exact LMI costs for your situation
• Explore all avoidance strategies available to you
• Find lenders with competitive LMI pricing
• Access professional packages and government schemes
• Make informed decisions about deposit vs. LMI trade-offs

Contact us for a personalized assessment of your LMI options and a strategy to minimize this significant cost.