LMI is a one-off cost that usually applies when your deposit is under 20% of the property's value. It protects the lender, not you, so it pays to know when it kicks in and what your options are before you sign anything.
If you are saving for a home in Canberra or the surrounding region, this is one of the first numbers worth working out.
What Is Lenders Mortgage Insurance and Who Does It Protect?
Lenders mortgage insurance (LMI) is a premium that covers the lender if a borrower with a small deposit can't repay the loan and the property sells for less than what is owed. You pay the premium, but the lender is the one protected.
That last part catches people off guard. LMI does not cover your repayments if you lose income. It simply makes lenders comfortable about approving a loan with a smaller deposit. The premium is a one-off charge, and you can usually either pay it upfront or add it to the loan, depending on the lender.
When Does LMI Apply? Your Deposit and Loan to Value Ratio
LMI usually applies when your loan to value ratio (LVR) is above 80%, which means your deposit is under 20% of the property's value. The smaller your deposit, the higher the premium tends to be.
The premium depends on the loan amount, your LVR and the lender's own policy. Two buyers with the same deposit percentage can be quoted different amounts if they borrow different sums or choose different lenders. Your borrowing capacity also matters here, because a higher LVR can shape how much a lender is willing to approve.
The trade-off is time. Waiting until you reach 20% avoids LMI, but it means more months of renting while you save, and property prices can move in the meantime. Buying sooner with LMI means a bigger loan and more interest, but you start building equity earlier. Neither choice is right for everyone.
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What LMI Adds to Your Repayments: A Worked Example
When LMI is added to your loan, it increases your repayments and the interest you pay, because you are borrowing the premium as well. Using an illustrative rate of 6.75% p.a., every $10,000 of LMI added to a 30 year principal and interest loan adds about $65 a month.
Consider a buyer with a 10% deposit who is quoted an illustrative LMI premium of $10,000. They don't want to drain their savings, so they ask the lender to add the premium to the loan. At the illustrative 6.75% rate, their monthly repayment rises by about $65 compared with a loan without LMI. They also pay interest on that $10,000 for as long as it stays in the loan, which is the main cost of this approach.
They can soften that by making extra repayments when their budget allows. Your actual numbers will differ with your lender, loan size and rate, so use a repayment calculator or ask us to run the figures for your situation.
Can First Home Buyers in the ACT Avoid LMI With a 5% Deposit?
Some eligible first home buyers can avoid LMI with as little as a 5% deposit through the Australian Government 5% Deposit Scheme, formerly known as the First Home Guarantee. Under the scheme, Housing Australia backs part of the loan, so the lender doesn't charge LMI.
Consider a couple who have saved a little over 5% for their first home loan and are renting in Canberra. They assume they need to save another year or two to reach 20%. When they speak to a broker, they find out the scheme may suit them, provided they meet the eligibility rules, the property sits within the price cap for its location, and they use a participating lender. They apply through the broker, and the lender approves a loan at about 95% of the purchase price with no LMI.
The outcome has a catch. A 95% loan is a large debt, so their repayments are higher than they would be with a bigger deposit, and they have less cushion if prices fall or rates rise. They also need to confirm the current rules and caps before they commit, because eligibility settings can change.
Comparing LMI Across Lenders Before You Apply
LMI costs can differ between lenders, so comparing them early can change which loan suits you. A lender with a slightly higher interest rate might still work out cheaper overall if its LMI premium is noticeably lower, or the reverse.
This is where a broker earns their place. A broker can look at the rate, the LMI quote and the loan features together, rather than judging on rate alone. Keep in mind that loans under the 5% Deposit Scheme are only available through participating lenders. It is also worth asking about LMI if you later look at refinancing with less than 20% equity, because the lender may treat the new loan as a fresh application.
Before you lodge a home loan application, ask for LMI quotes at two or three different deposit sizes. Seeing how the premium shifts when your deposit rises by a few percentage points can show you whether a short saving burst is worth it.
Call one of our team or book an appointment at a time that works for you, and we will map out your LMI options before you make an offer.
Frequently Asked Questions
What is lenders mortgage insurance (LMI)?
LMI is a one-off premium that protects the lender if a borrower with a small deposit can't repay the loan. It usually applies when your deposit is under 20% of the property's value.
Does LMI protect me as the borrower?
No. LMI covers the lender, not you, so it does not help with repayments if your income drops. You pay the premium, either upfront or added to the loan, depending on the lender.
How much does LMI add to my repayments?
It depends on the premium and your loan terms. As an illustration at 6.75% p.a. over 30 years on principal and interest, each $10,000 of LMI added to the loan adds about $65 a month.
Can I avoid LMI as a first home buyer in the ACT?
Eligible first home buyers may avoid LMI with a 5% deposit through the Australian Government 5% Deposit Scheme. Eligibility rules, price caps and participating lenders apply, so check the current details with a broker.
