First home buyers
How is LMI calculated for your home loan?
How is LMI calculated? Learn how lenders mortgage insurance is worked out from your loan amount and LVR, what LMI cost depends on, and how you may avoid it.
Lenders Mortgage Insurance, or LMI, is calculated by your lender’s mortgage insurer using two main inputs: how much you borrow and your loan-to-value ratio (LVR), which is the size of your loan compared with the value of the property. The smaller your deposit, the higher your LVR, and the higher the LMI premium tends to be. There is no single fixed rate. The figure comes from the insurer’s own pricing table, so the exact LMI cost depends on your circumstances and lender criteria.
This guide explains, in plain terms, what LMI is, when it applies, the inputs that drive the calculation, and the steps you can take to estimate or reduce it.
What LMI is and who it protects
LMI is a one-off insurance premium that protects the lender, not you, if you cannot keep up your repayments and the lender has to sell the property for less than the outstanding loan. It is worth understanding this clearly: you pay the premium, but the cover sits with the lender.
LMI usually applies when you borrow more than 80 per cent of the property value, which is the same as having a deposit below 20 per cent. According to Moneysmart, a 20 per cent deposit will avoid you needing to pay lenders mortgage insurance. So the threshold question for most buyers is simply how close your deposit is to that 20 per cent mark.
How is LMI calculated: the inputs that drive the cost
When people ask how is LMI calculated, the honest answer is that the insurer runs your numbers through a premium table. The main inputs are:
| Input | Effect on LMI |
|---|---|
| The loan amount | A larger loan generally means a larger premium, because the insurer is covering more. |
| Your loan-to-value ratio (LVR) | The single biggest driver. The closer your LVR creeps toward 95 per cent, the steeper the premium tends to climb. A loan at 81 per cent LVR will usually attract far less LMI than a loan at 94 per cent LVR. |
| Your deposit size | Deposit and LVR are two sides of the same coin. A bigger deposit lowers your LVR, which lowers the premium. |
| The lender and insurer | Different lenders use different mortgage insurers and different pricing tables, so the same loan can produce a different LMI cost from one lender to the next. |
Because the rate is not published as a single figure, the only reliable way to see your likely LMI cost is to run your own numbers or ask your broker to quote it across lenders.
Try the LMI calculator
An LMI calculator lets you enter your property value and deposit and see an estimate of the premium. It is a useful first step before you talk to anyone, and it helps you understand how much is LMI for your specific situation.
Try the LMI calculator
Open the calculator to run your own numbers.
How much is LMI, and what makes the cost move
There is no standard dollar figure for LMI, and we will not quote one here, because the premium can swing widely with your LVR. What we can say is how the cost behaves:
- A small change in your deposit can make a meaningful difference to the LMI cost, especially near the 90 to 95 per cent LVR band.
- LMI is usually a one-off premium rather than an ongoing fee.
- Many lenders let you add the LMI premium to your loan rather than pay it upfront. This is sometimes called capitalising the premium. It keeps cash in your pocket at settlement, but you then pay interest on it over the life of the loan, so whether it suits you depends on your circumstances and lender criteria.
If you want to map out the full picture, it helps to look at LMI alongside your other upfront costs. Moneysmart notes that a common savings goal for a house deposit is 20 per cent of the purchase price, plus enough to cover buying costs. Those buying costs include items such as stamp duty, which is a one-off state government property-transfer tax that you typically need to pay within 30 days of settlement.
How to work out your own LMI estimate
You can get a rough sense of your LMI position in a few steps.
Who may qualify to avoid LMI
There are a few recognised paths to buying with a smaller deposit while still avoiding LMI.
- A 20 per cent deposit. The simplest route. Reach 20 per cent and the LMI question usually disappears.
- A government low-deposit scheme. Moneysmart points out that if saving a 20 per cent deposit will take too long, you may be able to buy a house with a much smaller deposit and still avoid lenders mortgage insurance through a government scheme. The Australian Government 5% Deposit Scheme supports people buying their first home, buying in a regional area, or single parents and guardians to get into a home. Eligibility depends on the scheme rules and lender criteria, so it is worth checking whether you qualify.
- A guarantor. Some buyers use a family guarantor to lift their effective deposit and avoid LMI. Whether this is available, and whether it suits your family, depends on your circumstances and lender criteria.
LMI is not always the wrong choice. For some buyers, paying LMI to get into the market sooner can make sense, while for others it is worth waiting to reach 20 per cent. There is no single right answer, and it depends on your goals.
Where LMI fits in your first home buyer plan
LMI rarely sits on its own. It connects to your deposit goal, your borrowing power and your upfront costs. If you are early in the process, it can help to understand how lenders assess your deposit and how the schemes fit together. You can explore the broader picture on our first home buyers hub, and read more on related topics across The Lab.
How much deposit do I need?Talk it through
LMI can feel like a hidden cost, but it is usually predictable once you know your deposit and LVR. If you would like a clear quote on your likely LMI across multiple lenders, and an honest view on whether to pay it or wait, the team at Finance Lab can walk you through it.
Want this applied to your situation?
A Finance Lab broker can talk you through your income, deposit and goals, with no cost to chat and no obligation to proceed.