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By Nojan Rahimi, principal broker at Blutin Finance — 14+ years in finance, including 8+ years as a specialist mortgage broker, MFAA-accredited.
Current as of July 2026. LMI costs and government scheme rules change, so check the current figures before you rely on them.
Lenders mortgage insurance (LMI) is a one-off cost you pay when your deposit is under 20% of a property’s price. It protects the lender if you can’t repay the loan. It does not protect you. This guide covers what LMI is, what it typically costs, and the legitimate ways to avoid or reduce it.
LMI is insurance the lender takes out, but you pay for it. It covers the lender’s loss if you default and the property sells for less than you owe. The benefit flows to the lender. The cost sits with you.
Here is how that plays out with real numbers. Say you buy a property for $700,000 with a 10% deposit of $70,000. Your loan is $630,000. If you later default and the property sells for $600,000, there’s a shortfall of more than $30,000 once selling costs are added. The insurer covers that gap for the lender, then can come after you to recover it.
This is the point most buyers miss: LMI does not protect you. If you fall behind, it won’t save your home or cover a single repayment. It’s borrower-funded cover for the lender’s downside, not yours.
That’s different from cover designed to protect you, like income protection or life insurance. Those are separate products, and we’ll come back to them.
You generally need LMI when you borrow more than 80% of a property’s value, which is the same as having a deposit below 20%. Lenders treat a smaller deposit as a higher-risk loan, and LMI is how they offset that risk.
The trigger is your loan-to-value ratio (LVR). The formula is simple: LVR = (loan amount ÷ property value) × 100. On a $700,000 property with a $70,000 deposit, your $630,000 loan gives you an LVR of 90%. That’s above 80%, so LMI applies.
One detail catches people out. The lender orders its own valuation, and that figure can come in below the price you paid. If it does, your LVR rises, and a deposit you thought was enough can tip you into LMI territory.
Thresholds also vary by lender. Some apply tighter limits or higher premiums for investment loans, apartments, or particular locations. The exact trigger is set by the lender’s credit policy and its insurer’s rules, not a single national standard. To see how the ratio works in more detail, read our guide to your loan-to-value ratio (LVR).
LMI is a one-off cost, calculated as a percentage of the loan, usually somewhere between 1% and 5%. The bigger the loan and the smaller the deposit, the higher the premium climbs.
Four things drive the cost: the loan amount, your deposit size (and the resulting LVR), whether the property is owner-occupied or an investment, and which insurer the lender uses. You don’t get to shop the premium directly, because the lender arranges it.
The table below gives indicative 2026 estimates for owner-occupied loans. Treat these as a guide only. The actual premium depends on the lender and insurer, so always get a specific quote before you budget around it.
Loan amount | 95% LVR (5% deposit) | 90% LVR (10% deposit) | 85% LVR (15% deposit) |
$500,000 | ~$16,500–$21,000 | ~$7,200–$9,300 | ~$4,100–$5,200 |
$700,000 | ~$23,100–$29,400 | ~$10,000–$13,100 | ~$5,800–$7,300 |
$1,000,000 | ~$33,000–$42,000 | ~$14,300–$18,700 | ~$8,200–$10,400 |
The pattern is clear. Move from a 5% deposit to a 15% deposit on the same loan and the premium can drop by two-thirds or more. That’s one of the strongest reasons to weigh up saving a little longer, which we cover further down.
You can pay LMI upfront at settlement or add it to the loan. Most borrowers add it to the loan, because it means no extra cash on top of an already-stretched deposit.
There’s a trade-off to capitalising it, though. Once the premium is rolled into the loan, you pay interest on it for the life of the loan. A $13,000 premium doesn’t stay $13,000. Over 30 years you’re paying interest on that amount the whole way through, so the real cost is higher than the sticker figure.
LMI is also tied to one loan with one lender. It doesn’t move with you. If you refinance to a different lender while your LVR is still above 80%, you’ll generally pay a fresh premium with the new lender. That’s worth factoring in if you’re buying with a small deposit and expect to switch lenders early.
It’s generally non-refundable, too. Some insurers offer a partial refund if you discharge the loan very early, often within the first 12 to 24 months, but the conditions vary and many offer nothing. Check your loan documents before you assume a refund is on the table.
If you fall behind, the lender contacts you about the arrears first, and will often offer hardship assistance or a temporary change to your repayments. Lenders generally prefer to keep you in the loan than to force a sale.
If things don’t improve, the property may be sold to recover what’s owed. If the sale doesn’t cover the loan balance plus selling costs, there’s a shortfall. The lender then claims that shortfall on the LMI policy, and the insurer pays the lender.
Here is the part that surprises people. Once the insurer has paid the lender, it can pursue you, and any guarantor, for that shortfall debt. LMI settles the lender’s loss, not yours. You can still be chased for the gap.
If your worry is keeping up with repayments through illness, injury, or job loss, that’s a separate question with separate products, and we cover it below.
There are four common ways to avoid or cut LMI, and each comes with a catch. None of them is automatically the right move; it depends on your situation.
Save a 20% deposit. The cleanest way to avoid LMI entirely. The trade-off is time. In a rising market, prices can climb faster than you save, so the deposit target keeps moving.
Use a guarantor . A family member, usually a parent, offers equity in their own property as additional security. That lifts your effective security above 80% and can remove the LMI requirement. It also puts their property on the line, which we explain in the next section.
Lender discounts. Some lenders waive or reduce LMI for certain professions, or offer discounts on energy-efficient homes. These are lender-specific and change over time. Comparing across 45+ lenders is how you find the ones that apply to your situation.
The First Home Guarantee. Under this federal scheme, eligible first home buyers can buy with a 5% deposit and no LMI, because the government guarantees part of the loan in place of an insurer. It’s now part of the Australian Government 5% Deposit Scheme, expanded on 1 October 2025: income caps were removed, the cap on places was lifted, and property price caps were raised. For Melbourne, including the northern suburbs, the price cap is currently $950,000, though caps are set by postcode and reviewed periodically. Check current eligibility and the cap for your suburb at housingaustralia.gov.au before you rely on it. Our first home buyers guide walks through how the scheme fits with your other buying costs.
A guarantor takes on real liability, so this isn’t a favour to agree to lightly. The guarantor becomes legally responsible for the guaranteed portion of the loan. If you default and the sale doesn’t clear the debt, their property can be used to cover the shortfall.
Going guarantor also affects the guarantor’s own finances. Other lenders treat the guarantee as a liability, which can reduce how much the guarantor can borrow themselves while it’s in place.
There’s a way out over time. Once your LVR drops below 80%, through repayments or rising property value, the guarantee can often be released, subject to the lender’s policy. It isn’t automatic, so it’s worth asking the lender how release works before you start.
Because the stakes are real for both sides, both you and the guarantor should get independent legal and financial advice before signing. That’s standard practice, and a good broker will expect it.
These get confused constantly, so it’s worth being clear. LMI protects the lender. Mortgage protection insurance, income protection, and life insurance protect you. They’re different products with different jobs.
Mortgage protection and income protection can help cover your repayments if you’re hit by serious illness, injury, or involuntary unemployment, depending on the policy. They’re optional, you arrange them yourself, and they do nothing to reduce or replace LMI.
Whether any of these suit you is a question for a financial adviser. That’s their lane, not ours. We can explain the difference, but advising on personal insurance cover sits outside what a mortgage broker does.
LMI isn’t automatically good or bad. It’s a cost that buys you earlier entry, and whether that trade is worth it depends on your numbers and your market.
Pros | Cons |
Lets you buy sooner with a smaller deposit | A significant cost, often tens of thousands of dollars |
Can put a better-suited property within reach now | If added to the loan, you pay interest on it for years |
In a rising market, buying now can beat waiting | It protects the lender, not you, with no direct benefit to you |
Schemes like the First Home Guarantee can remove it entirely | You may pay it again if you refinance to a new lender early |
The honest way to read this table is to weigh the cost of LMI against the cost of waiting. Waiting can mean lost capital growth, more rent paid in the meantime, and the risk of being priced out. Sometimes paying LMI is the cheaper path; sometimes it isn’t.
There’s no universal answer, and anyone who gives you one is guessing. The decision turns on your income stability, how fast you can save, and where prices are heading in the area you want to buy.
The useful comparison is this. Work out how long it would take to save a 20% deposit, then estimate how much prices are likely to move over that same period. If values are climbing 5% to 7% a year, waiting can cost more than the premium.
Here’s an illustration with real figures. On a $700,000 property, lifting your deposit from 10% to 20% means saving roughly $70,000 more, which might take a couple of years. If prices rise 7% over those two years, the same home costs around $49,000 more, and your 20% target rises with it. Paying roughly $10,000 to $13,000 in LMI to buy now can work out cheaper than chasing a moving target. In a flat or falling market, the opposite holds, and saving longer to avoid LMI wins.
Your borrowing capacity is part of this too. Lenders assess your repayments at 3 percentage points above the actual rate, which is the APRA serviceability buffer , so a larger deposit also shrinks the loan you need to service at that buffered rate. You can get a rough sense of the numbers with a borrowing power calculator , then pressure-test them properly.
This is where we earn our keep. Before we put anything to a lender, we run an Honest Assessment of your deposit, your borrowing capacity, and the real cost of waiting versus buying now. It’s part of why over 95% of the applications we submit get approved. We’ll tell you which way the numbers point for your situation, even when the answer is to wait.
No, not on its own. LMI doesn’t automatically reduce your rate. What it does is let some lenders offer high-LVR loans at rates closer to their standard pricing, because the insurer is carrying the default risk. Your actual rate still depends on the lender, the loan, and your overall application.
Generally no. The lender arranges the cover with its own insurer, often Helia or QBE, or self-insures. You can’t pick the provider directly. You can, however, compare lenders, because premiums differ between them for the same loan.
It can apply to houses, apartments, and townhouses. Some lenders set stricter LVR limits or charge higher premiums for off-the-plan, high-density, or rural properties, which they view as higher risk. Stamp duty on the insurance premium can also vary by state.
It depends on the property, and this is a question for your tax adviser or the ATO rather than us. As a general rule, LMI on an owner-occupied home isn’t deductible, while LMI on an investment property may be claimable as a borrowing cost over time. Tax is the accountant’s lane, not ours, so confirm your situation with them.
Usually not. Some insurers offer a partial refund if you discharge the loan very early, often within 12 to 24 months, but many offer nothing, and the conditions vary. Refinancing to a new lender doesn’t refund your original premium. Check your specific loan contract before you count on it.
If you’re weighing up a smaller deposit against saving longer, that’s exactly the call we help with. Book a 30-minute first meeting and we can model different deposit sizes, LMI costs, and repayments against your actual numbers. No obligation, no fee, and no paperwork before the call.
Call 1300 188 808 or book a first meeting online . We’re an independent broker based in Bundoora , working across 45+ lenders for buyers right across Melbourne’s northern suburbs.