Lenders mortgage insurance (LMI) explained

Lenders mortgage insurance (LMI) is insurance a lender takes out on a home loan it considers higher risk — usually because the deposit is small. Housing Australia’s plain description is the clearest: it is “insurance that protects the lender if a borrower defaults on their home loan. The borrower pays the cost, which helps the lender recover losses if the property sells for less than the loan balance.” The cost is usually a one-off premium, and it typically arises when you borrow more than 80% of the property’s value.

The name trips people up. You pay the premium, but the policy is not for you — Moneysmart puts it plainly: LMI protects the lender if you can’t repay the loan; it doesn’t protect you, or your guarantor if you have one.

Whether LMI enters the picture comes down to your loan-to-value ratio (LVR) — the size of the loan compared with the property’s value, as the lender assesses it. Moneysmart’s example: borrowing $450,000 to buy a $600,000 home is a 75% LVR. The lower the LVR, Moneysmart notes, the lower your costs and the better your chance of loan approval.

Above 80% LVR is where LMI typically starts. That 80% figure is the common marker, not a law of nature — the exact threshold, and any exceptions, depend on each lender’s credit policy and the loan type. LVR is also only one part of an application: lenders separately test whether you can afford the repayments — see how lenders assess serviceability.

When LMI applies, there are two ways the one-off premium is usually handled: you pay it at settlement, or the lender adds it to your loan — what Moneysmart calls capitalisation. Capitalising avoids finding the cash upfront, but the premium then forms part of the balance you repay, so you pay interest on it for the life of the loan.

LMI attaches to the original loan with the original lender. If you refinance while your equity is still under 20%, Moneysmart warns you might have to pay LMI again with the new lender — a switching cost that can outweigh the interest you would save. It is one reason borrowers who paid LMI recently often wait until their LVR is comfortably below 80% before shopping around.

Moneysmart’s tip for switchers: ask your current lender for a refund of some of the LMI from your existing loan. Whether a refund is available — and how much — depends on the insurer’s and the lender’s policies, so treat it as a question worth asking rather than an entitlement. When weighing any switch, compare the whole cost of the move, not just the advertised rate — our explainer on comparison rates covers how.

The traditional route is the 20% deposit — an LVR of 80% or below, where LMI is typically not required. For first home buyers building that deposit, the First Home Super Saver Scheme allows voluntary superannuation contributions to be withdrawn for a deposit — up to $15,000 of voluntary contributions per year and up to $50,000 in total, plus associated earnings.

The main government pathway is the Australian Government 5% Deposit Scheme — the Home Guarantee Scheme, renamed and expanded on 1 October 2025. Housing Australia guarantees part of the loan to the lender, which removes the need for LMI for eligible buyers with a smaller deposit.

A different pathway again is Help to Buy, the Australian Government’s shared equity scheme: the government contributes up to 30% of the purchase price for an existing home, or up to 40% for a new home, with a minimum 2% deposit and 10,000 places a year. Applications opened on 5 December 2025. Because the government takes an equity share, the amount you need to borrow is smaller.

Under some lenders’ policies, a family guarantee can also reduce or remove the need for LMI — a parent or relative offers their own home or savings as additional security, sometimes limited to a set amount covering part of the deposit. The risks sit squarely with the guarantor: Moneysmart warns they may have to repay the entire loan including interest, fees and charges, the lender may sell the guarantor’s home if neither party can pay, and the guarantee can affect the guarantor’s own borrowing capacity and credit report. LMI does not protect the guarantor. Anyone considering this should get their own legal and financial advice before signing — our guarantor home loans page explains how these structures are set up.

Finally, some lenders offer LMI waivers or reduced-deposit policies for certain professions. Availability and criteria vary by lender, and these are commercial policies rather than government programs — treat any waiver as something to confirm in writing for your specific application.

One NSW-specific point worth knowing: an LMI policy over property in NSW is exempt from NSW insurance duty, provided the premium for the policy was paid on or after 1 July 2017 — see Revenue NSW’s insurance duty exemptions. The exemption applies to NSW only; other states and territories set their own insurance duty rules, which this resource does not cover.