Buying with a small deposit is possible in Australia, but it often triggers Lenders Mortgage Insurance. This guide explains how LMI works, when it applies above 80% LVR, and how much it can add to your costs.
It compares major banks and non bank lenders, outlines government guarantees that remove LMI, and shows practical ways to avoid or reduce it. You will see the impact on borrowing power and repayments, worked examples with real numbers, and a clear checklist. Use this to decide between paying LMI or saving more.
What is LMI and How Does it Work?
Lenders Mortgage Insurance protects the lender if a borrower defaults and the property sale does not cover the loan balance. It does not protect the borrower. In most cases a borrower pays a one off premium at settlement. Many borrowers choose to capitalise that premium into the loan so the cost is repaid over time with interest.
The premium is priced by an insurer based on risk. The main risk driver is the loan to value ratio. Higher LVR means higher risk, so a higher premium. Loan size matters as well. A larger loan at the same LVR attracts a larger premium. The borrower profile, property type, and location can influence the final figure. The exact pricing grid is proprietary to each insurer who partners with a lender.
When LMI applies in Australia
Most Australian lenders set 80% LVR as the threshold. Loans at or below 80% LVR usually do not require LMI. Loans above 80% LVR usually require LMI unless the borrower qualifies for a government guarantee or a guarantor structure that brings the effective LVR back to 80% or less.
- Purchases with a deposit under 20% usually trigger LMI unless covered by a government guarantee.
- Refinances above 80% LVR can require new LMI unless the borrower uses a guarantor or reduces the balance first.
- Construction loans and off the plan purchases follow the same rule. If the final LVR exceeds 80% the lender will require LMI unless a scheme or guarantor applies.
Who pays and what it covers
The borrower pays the premium, either up front at settlement or by adding it to the loan. The insurance covers the lender’s loss if the borrower defaults and the sale proceeds are not enough to clear the debt and costs. If a claim is paid, the insurer can seek recovery from the borrower for any shortfall that remains. LMI is therefore a cost that allows access to credit at a high LVR, but it is not a benefit that pays the borrower.
When LMI is required
The 80% LVR rule
The 80% rule is the core setting across the market. If you have a 20% deposit and meet all other lending criteria you typically avoid LMI. If you have less than a 20% deposit you usually pay LMI unless an approved alternative reduces the effective LVR. Lenders and insurers can apply additional rules for high density apartments, small studio properties, or unusual titles. The lender will tell you if a property type requires a lower maximum LVR.
Owner occupier versus investor treatment
Owner occupiers can often borrow to 90% or 95% LVR with LMI if their income, credit history, and savings track record support the application. Investor loans are assessed with more conservative settings by many lenders. Maximum LVRs for investors can be lower and serviceability tests can be stricter. The 80% threshold for LMI still applies to both groups. The difference is more visible in the maximum LVR a lender is willing to fund at all.
Bank versus non bank practice overview
Authorised deposit taking institutions tend to follow a consistent 80% rule on LMI and often rely on the same two external insurers. Many non-bank lenders also follow the 80% rule but may offer more flexible paths for borrowers who are just short of a 20% deposit. Examples include capitalising a larger share of the premium, accepting alternative income documents for self employed applicants, or combining a family guarantee with a small cash deposit. Regardless of the provider, an effective LVR at or below 80% is the target that avoids LMI in a standard policy.
How is LMI calculated?
Factors that drive premiums
Premiums rise as LVR rises and as the loan amount rises. A move from 90% LVR to 95% LVR can increase the premium sharply. Insurers consider the purpose of the loan, the type of security, and sometimes the borrower profile. High density postcodes can attract additional scrutiny. Because the pricing matrices are not public, borrowers should use an LMI calculator as a guide and assume a range rather than a single point estimate.
Capitalising LMI into the loan and cost over time
Capitalising LMI increases the loan amount. That can be helpful if cash at settlement is tight, however it raises repayments and interest costs. If the borrower plans to refinance once equity grows, the capitalised amount can be blended into a new loan. Some lenders limit how much LMI can be capitalised. Others allow capitalisation up to a set LVR cap. Always check how capitalisation interacts with the maximum LVR and with any property type caps.
Refund and portability rules
LMI is a policy tied to a specific loan and property. It is usually not portable. If you refinance early, you normally need to pay a new premium if the new loan is still above 80% LVR. Some insurers offer partial refunds if the loan is repaid within a short window. The window is limited and the refund amount declines quickly. Treat any refund as a possible credit rather than a certainty.
Government Programs That Remove the Need For LMI
Home Guarantee Scheme overview
The federal Home Guarantee Scheme replaces private LMI with a government backed guarantee for eligible buyers. The scheme lets qualifying owner occupiers purchase with a small deposit while avoiding LMI. The government guarantee covers the portion of the loan above 80% LVR up to a set limit. The buyer still needs to meet lender credit criteria and property price caps and income caps apply.
First Home Guarantee at 5% deposit
This stream supports eligible first home buyers who have at least 5% genuine savings. It allows a purchase at 95% LVR without paying LMI. The government provides a guarantee for the difference between the borrower’s deposit and the 20% benchmark.
Regional First Home Buyer Guarantee at 5% deposit
This stream targets eligible buyers in regional locations. It also permits a 5% deposit with no LMI where all criteria are met. Buyers must intend to live in the property and the property must be in an eligible area.
Family Home Guarantee at 2% deposit
This stream supports eligible single parents and eligible single legal guardians. It allows a purchase with as little as 2% deposit with no LMI, subject to price caps and income tests. The scheme can be used for an existing property or a new build.
Eligibility rules including income and price caps
Each stream has income caps and property price caps that vary by location. Applicants must be Australian citizens or permanent residents, must intend to live in the home, and must satisfy lender credit criteria. Applicants cannot own another property at the time of settlement except in specific limited cases within the scheme rules. Because caps and quotas change, always check the current Housing Australia guidance before applying.
Place availability and application pathway
The Home Guarantee Scheme is delivered through participating lenders. Places are limited and often open on a financial year cycle. A broker can help you confirm eligibility, reserve a place, and lodge a full application with a participating lender. If you secure a place the lender will apply the guarantee and remove the need for LMI at settlement.
Alternatives that reduce or avoid LMI
Family guarantor structure
A family member can offer property equity as additional security. The lender splits the loan into two parts. The guarantor covers the smaller top up portion that takes the effective LVR back to 80% or less. This can eliminate LMI. The guarantor’s liability is limited to the guaranteed portion. Once the borrower reduces the loan or the property value rises, the guarantee can be released.
Shared equity options including Help to Buy
Shared equity reduces the loan size so the LVR falls. The upcoming national Help to Buy program proposes a government equity contribution that lowers repayments and removes the need for private LMI where the effective LVR is 80% or less. Several state programs and private equity providers work on a similar principle. All shared equity options have trade offs, including giving up a share of capital gains when you sell or refinance.
Saving strategies and acceptable gift funds
Buyers who are close to a 20% deposit can shorten the gap by directing surplus cash flow into offset, by trimming non essential spending, and by selling unused assets. Genuine savings rules vary, however regular contributions into savings or offset over a set period are widely accepted. Gift funds from family can be used if the lender accepts the gift and the borrower can still meet serviceability tests on their own income.
Using equity from an existing property for investors
Investors who own another property can draw equity to create a 20% deposit on the new purchase. This can keep each loan at or under 80% LVR and avoid LMI. Cross collateralisation can add complexity. Many investors prefer to keep securities separate where possible.
Professional LMI waivers and caveats
Some lenders offer LMI waivers for specific professional groups. Criteria are strict and the offers change over time. Waivers can come with higher minimum incomes, lower maximum LVRs than you might expect, or limited property types. Treat waivers as a possible benefit rather than a strategic plan.
Risk and suitability considerations
Avoiding LMI is not the only objective. A strategy should also preserve cash buffers for emergencies, support stable repayments under higher rates, and align with your time horizon. A household that empties savings to avoid LMI may be more exposed to shocks than a household that pays LMI and keeps 3 months of expenses in reserve.
Impact of LMI on borrowing capacity and repayments
Serviceability settings and prudential buffers
Lenders test your ability to repay at a higher assessment rate than the actual rate. This buffer is designed to protect households and the financial system. At a given income and expense level, a higher loan amount driven by capitalised LMI can push the application to the edge of the buffer. Borrowers who are close to the limit can improve their position by reducing credit card limits, clearing small personal loans, or trimming discretionary expenses that show up on bank statements.
Long term cost comparison with and without LMI
The decision to pay LMI often comes down to total cost versus time to enter the market. Paying LMI brings forward the purchase date. That can capture property growth and rental savings sooner. Waiting to save a larger deposit can reduce interest and avoid the premium, however the property price might move in the meantime. The best choice depends on price momentum in the target area, your savings rate, your rental cost, and your tolerance for risk. We model these trade offs for clients so the numbers are explicit, not guessed.
Sensitivity to interest rate changes
High LVR loans are more sensitive to interest rate changes because repayments already sit near the maximum serviceable level. A small rise in rates can materially change borrowing capacity. Buyers who intend to refinance once equity rises should plan for rate changes and should test their budget at higher rates before committing.
Scenario modelling with real numbers
Consider a purchase price of 700,000 with 5% deposit. The base loan would be 665,000 before costs. If the application uses a Home Guarantee Scheme place, the borrower can avoid LMI and borrow the base amount. If the application proceeds without a scheme or guarantor, the lender will require LMI. If the premium were capitalised, the new loan would be the base loan plus the premium. Repayments would then be calculated on the higher balance.
Now consider an investor at 90% LVR on a 700,000 purchase. The base loan would be 630,000 before costs. Many lenders will allow this subject to LMI and stricter serviceability tests. If the investor draws equity from an existing property to lift the deposit to 20%, LMI can be avoided. The total debt across properties rises, however each new loan can sit at or below 80% LVR.
Finally consider a first home buyer with 10% deposit on a 700,000 purchase. The base loan would be 630,000. If a parent offers a limited guarantee that covers the top 10% portion, the effective LVR becomes 80% and the lender can approve with no LMI. When the loan reduces or the property value grows, the guarantee can be released and the parent’s property becomes unencumbered again.
These figures are illustrative only. Actual premiums, caps, and approval settings depend on the insurer, the lender, and the property. Use them as a guide to understand the mechanics. We will verify exact numbers during pre assessment and we will present side by side comparisons that include all fees and government charges.
Choosing between paying LMI or saving a larger deposit
- Define the target property price and location with realistic boundaries that include recent sales evidence.
- Calculate your current maximum borrowing capacity and your buffer at the lender’s assessment rate.
- Estimate the LMI premium range at 90% and 95% LVR, and model capitalising the premium versus paying it in cash.
- Compare the monthly cost of buying now with LMI against renting and saving for an extra 12 months and 24 months.
- Stress test both paths for rate rises, a small property price rise, and a small price fall, then decide based on risk and comfort rather than headline rate alone.
Documentation checklist for high LVR lending
- Photo ID and residency evidence for all applicants.
- Recent payslips or accountant prepared income evidence for self employed applicants, plus the most recent tax returns and notices of assessment.
- Bank statements that show salary credits, rent, and living expenses across the last 3 months, plus statements for any existing loans and credit cards.
- Evidence of genuine savings and the source of any gift funds.
- A contract of sale or a formal builder contract for construction, plus quotes for associated costs like lenders fees and government charges.
Empower Money as a practical alternative to LMI
Empower Money helps clients avoid or reduce LMI through structure, strategy, and access to products that support low and no deposit entry. Our Power Up Elite path offers a no deposit route for eligible applicants, subject to responsible lending checks, property caps, and risk controls that keep repayments sustainable.
We combine government guarantees, family guarantor options, and shared equity where suitable. We also design a clear exit plan that takes you from a high LVR position to a stable 80% or lower LVR through a mix of repayment discipline and equity growth. If LMI remains the best path for your circumstances, we will say so plainly and we will work to secure competitive terms and a clean refinance plan once equity builds.
Key risks and consumer protections
If repayment difficulty arises, contact the lender early and request hardship support. Formal hardship arrangements can pause or reduce repayments for a period and preserve your credit history. If a dispute about an approval or a declined claim arises, you can escalate to the external dispute resolution scheme.
Consumer guidance from the regulator sets out how lenders must assess living expenses, buffers, and the use of LMI on high LVR loans. Independent advice is sensible for complex cases.
FAQs
Do investors qualify for any government guarantees that avoid LMI
Current federal guarantees focus on owner occupiers. Investors usually need to meet the 80% rule or use a guarantor or equity release to avoid LMI. Policy settings can change. We will confirm eligibility before you lodge any application.
Can LMI be transferred when I buy a new property
LMI is tied to a specific loan and property. If you sell and buy again or refinance above 80% LVR, a new premium is normally required. Some insurers offer limited refunds for early discharge. Portability is rare and subject to strict conditions.
Is LMI tax deductible for investors in Australia
For many investors LMI is a borrowing cost that can be claimed over a number of years. The exact treatment depends on individual tax circumstances. Seek advice from a registered tax agent before relying on any assumption.
What deposit do I need to avoid LMI entirely
You generally need a 20% deposit plus enough to cover government charges and lender fees. Alternatively, a guarantor or an eligible government guarantee can reduce the effective LVR to 80% and remove the need for LMI even if your cash deposit is smaller.
Can I refinance later to remove LMI or reduce its impact
Yes. Once the loan balance falls or the property value rises so that the LVR is at or below 80%, you can refinance to a new loan that does not require LMI. We normally plan this as a timed step so you do not pay break fees or new government charges unnecessarily.
Methodology and sources
We base this guide on publicly available rules and consumer guidance from Australian regulators and government agencies. We reference Housing Australia for scheme settings, APRA for prudential settings and LVR norms, the Reserve Bank of Australia for credit and serviceability context, and ASIC Moneysmart for consumer explanations of LMI. We also rely on direct experience of approval policies across lenders during the past 12 months. All policy settings are subject to change. Always confirm current criteria before you commit to a purchase.
