How much does LMI cost for a first home buyer?

So how much does LMI cost? The honest answer is that there is no single fixed figure. Lenders Mortgage Insurance (LMI) is a one-off premium worked out by your lender’s mortgage insurer, and the amount moves with how much you borrow and the size of your deposit. There is no published flat rate, so the exact cost of Lenders Mortgage Insurance depends on your circumstances and lender criteria. What you can do is understand what drives the figure, see when it applies, and use an LMI cost calculator to estimate it for your own situation.

This guide explains what LMI is, when it applies, what makes the premium move, how to estimate it, and the recognised ways you may avoid it.

What LMI is and who it protects

Lenders Mortgage Insurance is a one-off cost to a home loan borrower. According to Moneysmart, it protects the lender if borrowers are unable to repay their loan, and it is payable when the amount borrowed exceeds 80 per cent of the value of the property.

It is worth being clear on one point. Moneysmart states plainly that LMI does not benefit the borrower, it only protects the lender. You pay the premium, but the cover sits with the lender if the loan cannot be repaid and the property has to be sold for less than the outstanding balance.

How much does LMI cost, and what drives the premium

There is no standard dollar figure for LMI, and we will not invent one here. What we can explain is how the cost behaves and what moves it.

The premium is driven mainly by your loan amount and your loan-to-value ratio (LVR), which is your loan size compared with the property value. A smaller deposit means a higher LVR, and a higher LVR generally means a higher premium. The lender and the mortgage insurer also matter, because different lenders use different insurers and different pricing tables, so the same loan can produce a different cost of Lenders Mortgage Insurance from one lender to the next.

A few things are usually true of the premium:

• It is usually a one-off cost rather than an ongoing fee.
• It tends to climb as your LVR rises toward the higher bands, so a small change in your deposit can make a meaningful difference.
• Many lenders let you add the premium to your loan instead of paying it upfront, which keeps cash in your pocket at settlement but means you pay interest on it over the life of the loan.

If you want to understand the LVR side of this in more detail, it is covered on our guide to LVR for first home buyers.

Try the LMI cost calculator

An LMI cost calculator lets you enter your property value and deposit and see an estimate of the premium. It is a sensible first step before you talk to anyone, and it gives you a realistic sense of the cost for your own numbers rather than a figure pulled from an advertisement.

When LMI applies

LMI usually applies when you borrow more than 80 per cent of the property value. Moneysmart puts it from the other direction too: if you have less than 20 per cent equity in your home, you might have 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.

The figures that matter most here are the same two numbers, viewed two ways.

How to estimate your own LMI cost

You can get a rough sense of your position in a few steps before you speak to a broker or lender.

A mortgage broker can help with this comparison. Moneysmart describes a broker as a go-between who deals with banks or other lenders to arrange a home loan, and notes that a good broker should present you with more than one option from a range of lenders. Moneysmart also suggests asking a broker what the threshold is for Lenders Mortgage Insurance and how you can avoid it. You can read more about this in our guide to using a mortgage broker.

Who may qualify to avoid LMI

There are a few recognised paths to buying with a smaller deposit while still keeping the LMI cost down or avoiding it.

• A 20 per cent deposit. The simplest route. Moneysmart notes that saving a bigger deposit means you borrow less, so your loan costs less, and you may avoid extra charges like LMI. Reach 20 per cent and the LMI question usually disappears.
• A government low-deposit scheme. Moneysmart points out that a scheme lets eligible first-home buyers purchase a home with a deposit as small as 5 per cent, without paying Lenders Mortgage Insurance. Eligibility depends on the scheme rules and lender criteria, so it is worth checking whether you qualify. We cover this in our guide to buying with a 5 per cent deposit.
• A family guarantor. Some buyers use a family guarantor to lift their effective deposit and reduce or avoid LMI. Whether this is available, and whether it suits your family, depends on your circumstances and lender criteria.

There is one more point worth knowing if you later switch lenders. Moneysmart notes that if you have less than 20 per cent equity, LMI can increase the cost of switching and may outweigh the savings from a lower interest rate. If you do decide to switch, Moneysmart suggests asking for a refund of some of the LMI from your current loan.

Where the LMI cost fits in your first home buyer plan

The cost of Lenders Mortgage Insurance rarely sits on its own. It connects to your deposit goal, your borrowing power and your other upfront costs. If you are early in the process, it helps to understand how lenders assess your deposit and how the low-deposit schemes fit together, so you can weigh paying LMI against waiting to save more. You can explore the wider picture on our first home buyers hub, and read how the premium itself is worked out in our guide to how LMI is calculated.

Talk it through

The cost of LMI can feel like a hidden number, but it becomes predictable once you know your deposit and your LVR. If you would like a clear estimate of 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.

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