Lenders Mortgage Insurance is a one-off premium charged when you borrow more than 80% of a property's value. It protects the lender if you default, not you, but it can help you buy sooner with a smaller deposit.
How Lenders Mortgage Insurance Is Calculated
LMI is calculated based on your loan amount and your loan to value ratio. The higher your LVR, the higher the premium. A borrower with a 10% deposit typically pays more than someone with a 15% deposit, even on the same property. The premium is also influenced by the loan amount itself, so two borrowers with the same LVR but different loan amounts will pay different premiums.
Consider a buyer purchasing in Craigieburn with a 10% deposit. The LMI premium might be several thousand dollars, and that cost is usually added to the loan amount rather than paid upfront. This means you'll pay interest on the premium over the life of the loan. Some lenders allow you to pay the premium upfront if you prefer, but most borrowers capitalise it into the loan to preserve cash for settlement costs and moving expenses.
When Paying LMI Makes Sense
Paying LMI can be the right decision if waiting to save a larger deposit means missing out on a property or delaying your entry into the market. Property values in growth areas like Mernda and Wollert have increased consistently over recent years, so the cost of waiting can sometimes exceed the cost of the premium.
In our experience, first home buyers who pay LMI often build equity faster than they would by renting and saving. If you're buying an owner occupied home and you're confident in your income stability, paying the premium to enter the market sooner can work in your favour. The key question is whether the property's value is likely to grow enough to offset the premium cost within a reasonable timeframe.
LMI Waivers for Certain Professions
Some lenders offer LMI waivers or discounts for borrowers in specific professions, including medical practitioners, accountants, and legal professionals. These waivers can allow you to borrow up to 90% or even 95% of the property value without paying the full premium.
If you work in one of these fields, it's worth exploring home loan options that include professional packages. Not all lenders offer the same waiver terms, and some require you to have worked in the profession for a minimum period before you qualify. The waiver can save you tens of thousands of dollars depending on your loan amount and LVR.
How LMI Affects Your Borrowing Capacity
LMI itself doesn't reduce your borrowing capacity, but the loan amount you need to cover the premium does. If your premium is capitalised into the loan, your total debt increases, which can push you closer to your borrowing limit. This can be a concern if you're already stretching your serviceability.
Some borrowers assume that because they can borrow a certain amount, they can also afford to add the LMI premium on top. That's not always the case. Lenders assess your ability to service the full loan amount including the capitalised premium, so if adding LMI takes you over your maximum borrowing capacity, you'll need to either increase your deposit or reduce your purchase price. Understanding your borrowing capacity before you start looking at properties can help you avoid this issue.
Avoiding LMI by Using a Guarantor
A family guarantee allows you to borrow more than 80% of the property value without paying LMI. A parent or close relative uses the equity in their own property as additional security, which reduces the lender's risk and removes the need for the premium.
As an example, a buyer in South Morang with a 5% deposit could avoid LMI entirely if a parent guarantees a portion of the loan. The guarantee is typically limited to the amount needed to bring the LVR down to 80%, so the guarantor isn't securing the entire loan. Once you've built enough equity through repayments or property value growth, the guarantee can be removed. This option works well for first home buyers who have family support but limited savings.
LMI and Investment Loans
LMI applies to investment loans in the same way it does to owner occupied loans, but the premiums are often slightly higher. Lenders view investment properties as higher risk because borrowers are more likely to sell or default if rental income drops or interest rates rise.
If you're buying an investment property in a high-demand area like Epping, paying LMI might still make sense if the rental yield and capital growth potential justify the additional cost. The premium is generally tax-deductible for investment loans, which can reduce the effective cost. You should speak with your accountant to confirm how the deduction applies in your situation, but for many investors, the ability to enter the market sooner outweighs the premium cost.
Refinancing and LMI
If you're refinancing and your LVR is above 80%, you may need to pay LMI again with the new lender. This can happen if your property value hasn't increased enough to bring your LVR down, or if you're borrowing additional funds as part of the refinance.
Some lenders will transfer your existing LMI policy if you refinance with them, but this isn't standard across all lenders. If you paid a large premium when you first bought your property, it's worth checking whether your current lender will allow you to port the policy before you switch. If not, factor the cost of a new premium into your comparison when you're looking at home loan rates with other lenders.
Call one of our team or book an appointment at a time that works for you. We'll explain how LMI applies to your situation, compare loan options across multiple lenders, and help you decide whether paying the premium now or waiting to build a larger deposit makes more sense for your circumstances.
Frequently Asked Questions
What is Lenders Mortgage Insurance and who does it protect?
Lenders Mortgage Insurance is a one-off premium charged when you borrow more than 80% of a property's value. It protects the lender if you default on the loan, not you as the borrower.
Can I avoid paying LMI if I have a smaller deposit?
Yes, you can avoid LMI by using a family guarantee, where a parent or close relative uses equity in their property as additional security. Some professions also qualify for LMI waivers or discounts with certain lenders.
Is LMI tax-deductible for investment properties?
Yes, LMI is generally tax-deductible for investment loans. You should speak with your accountant to confirm how the deduction applies to your specific situation.
Do I have to pay LMI again if I refinance?
You may need to pay LMI again if your loan to value ratio is still above 80% when you refinance. Some lenders will transfer your existing LMI policy if you stay with them, but this isn't standard across all lenders.
How does paying LMI affect my borrowing capacity?
LMI itself doesn't reduce your borrowing capacity, but if the premium is added to your loan amount, your total debt increases. Lenders assess your ability to service the full loan including the capitalised premium, which can affect how much you can borrow.
