How to avoid LMI when buying your first home

The most common way to avoid LMI is to have a deposit of 20 per cent or more of the property value. Lenders Mortgage Insurance (LMI) usually applies when you borrow more than 80 per cent of what the property is worth, so reaching that 20 per cent mark generally removes the cost. If saving 20 per cent will take too long, there are other ways to avoid LMI, including a government low-deposit scheme or a family guarantor. Which path suits you depends on your circumstances and lender criteria.

This guide explains, in plain terms, what LMI is, when it applies, and the realistic ways to avoid paying lenders mortgage insurance, including how to avoid LMI without a 20 per cent deposit.

What LMI is and who it protects

Lenders Mortgage Insurance is a one-off insurance premium that protects your lender, not you, if you cannot repay the loan and the lender has to recover the debt. According to ASIC Moneysmart, LMI protects a credit provider if borrowers are unable to repay their loan, and it does not benefit the borrower, it only protects the lender. You pay the premium, but the cover sits with the lender.

That is why so many first home buyers want to know how to avoid lenders mortgage insurance. It is a real cost that adds nothing to your own protection, so avoiding it where you sensibly can keeps more money in your pocket. You can read more about how lenders work it out on our How is lmi calculated guide.

When does LMI apply?

LMI usually becomes payable when the amount you borrow exceeds 80 per cent of the value of the property. The same idea is often described using your loan-to-value ratio (LVR), which is your loan amount compared with the property value, written as a percentage. If your LVR is above 80 per cent, you may need to pay LMI. A 20 per cent deposit takes your LVR to 80 per cent or below, which is why it generally avoids the cost.

So the threshold question for most buyers is simple: how close is your deposit to 20 per cent of the purchase price?

Ways to avoid LMI

There are a few recognised ways to avoid LMI. None of them is automatically right for everyone, and each depends on your circumstances and lender criteria.

Save a 20 per cent deposit

This is the simplest route. 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, and that a 20 per cent deposit will avoid you needing to pay lenders mortgage insurance. Reach 20 per cent and the LMI question usually disappears.

The trade-off is time. Saving a larger deposit can take years, and prices can move while you save, so a bigger deposit is not always the fastest way into a home.

Use a government low-deposit scheme

If saving 20 per cent will take too long, you may be able to buy with a much smaller deposit and still avoid LMI. Moneysmart points out that some lenders may accept a deposit as little as 5 per cent, and that under a government deposit scheme eligible buyers may be able to purchase a home with a deposit as small as 5 per cent without paying lenders mortgage insurance. This is one of the main ways to avoid LMI without a 20 per cent deposit. Eligibility depends on the scheme rules and lender criteria, so it is worth checking whether you qualify. Our Buying with 5 percent deposit guide walks through how a 5 per cent deposit can work.

Ask whether a family guarantor could help

Some buyers ask a family member to act as a guarantor, using equity in their own property as additional security. This can lift your effective deposit and may let you avoid LMI even though your own savings are below 20 per cent. A guarantor arrangement carries real responsibility for the guarantor, so whether it is available, and whether it suits your family, depends on your circumstances and lender criteria.

How much deposit do I need to avoid LMI?

For most buyers, the answer is 20 per cent of the property value, because that takes your LVR to 80 per cent. Below that level, LMI generally applies unless you use a scheme or guarantor to bridge the gap. If you want the full picture on how the ratio works, see our What is lvr first home buyer guide.

A quick way to picture it: on a 600,000 dollar property, a 20 per cent deposit is 120,000 dollars, which leaves a 480,000 dollar loan at 80 per cent LVR. A smaller deposit lifts your LVR above 80 per cent and brings LMI back into play, unless one of the routes above applies.

How to check your own position

You can get a sense of whether LMI will apply in a few steps.

Try the LMI calculator

An LMI calculator lets you enter your property value and deposit and see an estimate of any premium. It is a useful first step before you talk to anyone, and it helps you weigh up whether to pay LMI now or wait to reach 20 per cent.

Is avoiding LMI always the right call?

Not always. For some buyers, paying LMI to get into the market sooner can make sense, especially if prices are rising faster than they can save. For others, it is worth waiting to reach 20 per cent. There is no single right answer, and it depends on your goals, your timeline and the numbers in front of you.

Where this fits in your first home buyer plan

Avoiding LMI rarely sits on its own. It connects to your deposit goal, your borrowing power and the upfront costs of buying. If you are early in the process, it helps to understand how lenders read your deposit and how the low-deposit schemes work alongside your LVR. You can explore the broader picture on our First home buyers hub.

Talk it through

LMI can feel like a hidden penalty for buying sooner, but it is usually predictable once you know your deposit and your LVR. If you would like a clear view of whether you can avoid LMI, and an honest read on whether to wait or use a scheme, the team at Finance Lab can walk you through your options.

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