LMI and What Not to Pay For It

What Is Lenders Mortgage Insurance and Why Do Banks Charge It

Lenders Mortgage Insurance protects the bank, not you.

When you borrow more than 80% of a property's value, most lenders will require you to pay for an insurance policy that covers them if you default and the property sells for less than what you owe. The premium can run anywhere from a few thousand dollars to over $30,000 depending on your loan amount and deposit size. You pay for it, the bank is the beneficiary, and you receive no ongoing coverage or benefit once the policy is issued.

Under APRA's Prudential Standard APS 112, banks are required to hold more capital against higher-risk loans. LMI allows them to reduce that capital requirement, which is why they insist on it above 80% loan to value ratio. The cost is passed directly to you, either as an upfront premium added to your loan amount or paid at settlement.

Consider a buyer in Carlton looking at a unit close to the train station. With a 10% deposit, they are borrowing 90% of the property value. On a loan amount around the suburb's median unit price, the LMI premium alone could sit between $8,000 and $15,000. That amount does not reduce your interest rate, does not lower your repayments, and does not protect you if something goes wrong. It exists solely to transfer the lender's risk back to an insurer.

The insurer who underwrites the policy is regulated by APRA, and the policy must cover losses up to at least 40% of the original or outstanding loan amount to qualify under the prudential standard. Once you have paid the premium and the loan settles, the coverage remains in place for the life of the loan even if your equity position improves. You cannot cancel it or get a refund.

How LMI Is Calculated and What Drives the Premium

The premium is calculated on a sliding scale based on your loan amount and your loan to value ratio.

Every lender uses an LMI provider, and while the rates vary slightly between insurers, the formula is consistent. The higher your LVR and the larger your loan, the higher the premium. A borrower at 85% LVR will pay less than a borrower at 95% LVR on the same loan amount. A borrower at 90% LVR on a $600,000 loan will pay less than a borrower at 90% LVR on a $900,000 loan.

Some lenders also apply different premium structures depending on whether the loan is for an owner-occupied property or an investment property. Investment loans generally attract a higher LMI premium because the insurer considers them higher risk. Interest-only loans at high LVRs can also trigger higher premiums or stricter conditions.

In Carlton, where unit prices have remained relatively stable and most buyers are purchasing established apartments close to Kogarah Bay or the Princess Highway, a borrower with a 15% deposit on an owner-occupied unit loan would typically sit at an 85% LVR. The LMI premium in that scenario might be somewhere between $5,000 and $10,000, depending on the lender and the exact loan amount. That premium is usually capitalised into the loan, meaning you are paying interest on it for the next 25 or 30 years.

Some lenders will also allow you to pay the premium upfront at settlement rather than adding it to the loan. Paying upfront avoids the compounding interest cost, but it requires additional cash on hand at a time when most buyers have already stretched their savings to cover the deposit and other settlement costs.

The Australian Government 5% Deposit Scheme and How It Replaces LMI

The Australian Government 5% Deposit Scheme allows eligible buyers to purchase with a 5% deposit without paying LMI.

Housing Australia provides a guarantee to the lender of up to 15% of the property value, which brings the combined deposit and guarantee to 20%. The lender treats the loan as though you have put down a 20% deposit, so no LMI premium applies. You still need to meet the lender's serviceability requirements, and the 3.0 percentage point buffer still applies, but the upfront cost saving can be significant.

In NSW, the price cap for the scheme is $1,500,000 in capital cities and regional centres, and $800,000 in other areas. Carlton is within the Greater Sydney metro area and falls under the $1,500,000 cap. Both the purchase price and the lender's valuation must be at or below that threshold. There are no income caps, and there is no annual limit on the number of places available. Applications are made through participating lenders, not directly through Housing Australia.

As an example, a buyer purchasing a two-bedroom unit in Carlton at a valuation within the scheme cap could access the guarantee with a 5% deposit. If the property is valued at $800,000, the buyer would need $40,000 as a deposit plus settlement costs. Without the scheme, a 10% deposit loan at $720,000 would trigger an LMI premium around $12,000 to $18,000 depending on the lender. The scheme removes that cost entirely.

The scheme is available on fixed rate, variable rate, and split loan structures, depending on the participating lender. Not all lenders on the panel offer every loan type, so it is worth comparing your options before committing. Some lenders also have faster processing times or more flexible serviceability policies within the scheme.

When Paying LMI Might Actually Make Sense

There are scenarios where paying LMI is the better option, particularly if waiting to save a larger deposit would cost you more in rising property values or rent.

If property values are increasing and you are confident you can service the loan comfortably, paying LMI to enter the market sooner may work in your favour. The premium is a one-off cost, and if the property appreciates while you are building equity, the percentage cost of that premium relative to your overall gain becomes less significant over time.

Consider a buyer who is currently renting in Carlton and has saved a 10% deposit but not quite enough for 20%. Waiting another two years to save the additional deposit might mean paying $35,000 to $40,000 in rent during that time, while also risking further price growth in the suburb. If the LMI premium is $10,000 and the buyer can comfortably afford the repayments, entering the market now and paying the premium might be the more practical decision.

Another scenario is when a buyer is purchasing an investment property and the LMI premium is tax-deductible. The premium can be claimed as a borrowing expense and deducted over five years or the term of the loan, whichever is shorter. For an investor with other income to offset, the after-tax cost of the premium is lower than the headline figure.

LMI also becomes relevant when a buyer is using a guarantor loan structure but does not have enough equity in the guarantor's property to cover the shortfall. In that case, LMI may still apply to a portion of the loan, though the premium will be lower than it would be without the guarantor.

What Happens to LMI When You Refinance

When you refinance to a new lender, the original LMI policy does not transfer with you.

If your loan to value ratio at the time of refinancing is still above 80%, the new lender will require a new LMI policy and you will be charged a new premium. There is no credit or refund for the LMI you paid on the original loan. If your LVR has dropped below 80% due to repayments or property value growth, you will not need to pay LMI again.

This is one reason why refinancing in the first few years of a loan can be costly if your equity position has not improved. A borrower in Carlton who purchased with a 10% deposit and refinances two years later may still be sitting at an 85% or 90% LVR if the property value has remained flat and repayments have only just started to reduce the principal. The new LMI premium in that scenario could be close to what was paid originally, which often makes refinancing uneconomical unless the rate saving is substantial.

Some lenders offer LMI portability, which allows you to transfer the existing policy to a new property if you sell and buy again within a set timeframe. This is not common and usually only applies if you are staying with the same lender and the new loan amount is similar or lower. It is worth asking about if you are planning to move within a few years of purchasing.

Carlton's Property Market and What It Means for Deposit Planning

Carlton is a small, established suburb on the southern edge of Kogarah Bay, bordered by Kogarah to the south and Allawah to the north.

Most of the housing stock consists of older low-rise units and a smaller number of freestanding homes on elevated blocks near the water. The suburb is well connected by the Allawah train station on the Illawarra Line and the T4 Eastern Suburbs and Illawarra Line, with direct access to the city and south to Wollongong. Proximity to Kogarah Private Hospital, St George Hospital, and schools in neighbouring Kogarah makes it popular with downsizers and young families looking for affordability close to established infrastructure.

Property values in Carlton have not experienced the same level of growth as suburbs closer to the harbour or eastern beaches, which means buyers are not facing the same urgency to enter the market at any cost. A measured approach to deposit planning, particularly for buyers who can access the Australian Government 5% Deposit Scheme or who are close to a 20% deposit, is often more suitable than rushing in with a smaller deposit and paying a large LMI premium.

For buyers targeting units in Carlton, confirming the strata report and understanding levies and sinking fund balances is just as important as managing the upfront loan costs. Older unit blocks in the suburb may have higher levies or upcoming special levies for building works, which can affect serviceability and your ability to save while holding the property.

Call one of our team or book an appointment at a time that works for you. We will walk through your deposit position, explain which lenders offer LMI waivers or discounts for your situation, and make sure you are not paying more than you need to.

Frequently Asked Questions