LMI for first home buyers: what it is and when it applies

If you are a first home buyer, Lenders Mortgage Insurance (LMI) is a one-off cost that usually applies when your deposit is under 20 per cent of the property value, which means you are borrowing more than 80 per cent of what the property is worth. LMI protects your lender, not you, if you cannot repay the loan. Whether it applies, and how much it could cost, depends on your deposit, your loan-to-value ratio and the lender’s criteria.

This guide explains, in plain terms, what LMI is, who it protects, when it applies to a first home buyer, and the realistic ways to reduce or avoid it. We have kept it free of jargon, and where we cite a figure we link to the source so you can check it yourself.

What is LMI?

Lenders Mortgage Insurance is an insurance premium you pay that protects the lender if a borrower cannot repay the loan. 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. So even though you pay for it, the cover sits with the lender, not with you.

That is the part many first home buyers find surprising. LMI is not a safety net for your repayments and it is not insurance on your home. It is the lender’s protection against the extra risk of lending you a larger share of the property value. If you have ever asked what is LMI, that is the short answer: a lender’s insurance that the borrower pays for.

When does LMI apply to a first home buyer?

LMI is usually a one-off cost to a home loan borrower, payable when the amount borrowed 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 lenders mortgage insurance.

For a first home buyer, this matters because saving a 20 per cent deposit can take years. A deposit under 20 per cent lifts your LVR above 80 per cent, which is the zone where LMI generally applies. So the threshold question for most first home buyers is simple: how close is your deposit to 20 per cent of the purchase price? If you want the full picture on how the ratio works, see our What is lvr first home buyer guide.

How is LMI paid?

You pay the lenders mortgage insurance at settlement, or your lender adds it to your loan. Adding it to the loan, sometimes called capitalising the premium, spreads the cost across your repayments rather than paying it all upfront. That can be easier on your savings at settlement, but it means you pay interest on the premium over the life of the loan, so it depends on your circumstances and lender criteria which option suits you.

The premium itself is not a fixed figure. It generally rises as your deposit gets smaller and your loan gets larger, because a higher LVR is a bigger risk for the lender to insure. The amount also varies between insurers and lenders, which is why two buyers with the same property value can be quoted different premiums.

What LMI does not do

It is worth being clear about what LMI does not cover, because the name can be misleading.

Because LMI adds nothing to your own protection, many first home buyers want to know whether they can reduce or avoid it. That is a reasonable goal, as long as you weigh it against the cost of waiting longer to buy.

Ways to reduce or avoid LMI

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

Save a larger deposit

A 20 per cent deposit will avoid you needing to pay lenders mortgage insurance, because it takes your LVR to 80 per cent or below. Saving a bigger deposit also means you may avoid extra charges like LMI. 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 a house with a much smaller deposit and still avoid lenders mortgage insurance. The First Home Guarantee scheme lets eligible first home buyers purchase a home with a deposit as small as 5 per cent, without paying LMI, because the government guarantees part of the loan, which lowers the risk for lenders. Eligibility depends on the scheme rules and lender criteria, so it is worth checking whether you qualify.

Ask whether a family guarantor could help

Some home buyers have a family member 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.

If you want a deeper read on the options, our guide on How to avoid lmi walks through each route and its trade-offs.

Who may qualify for the no-LMI low-deposit option

The First Home Guarantee is aimed at eligible first home buyers, and it lets them buy with a deposit as small as 5 per cent without paying LMI. Eligibility is set by the scheme rules and your lender, so it is not automatic. Whether you qualify, and whether it is the right move for you, depends on your circumstances and lender criteria. The team at Finance Lab can help you check whether you are likely to be eligible before you apply.

How to check whether LMI will apply to you

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

A borrowing calculator lets you enter your figures and see how much you may be able to borrow against your deposit, which helps you picture whether your LVR lands above or below 80 per cent. Try the how much can you borrow calculator before you talk to anyone.

Is avoiding LMI always the right call?

Not always. For some first home 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, or checking whether a low-deposit scheme fits. There is no single right answer, and it depends on your goals, your timeline and the numbers in front of you.

If you are weighing up the actual dollar figure, our Lmi cost explained guide explains what drives the premium up or down.

Talk it through with the team at Finance Lab

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 LMI will apply to you, and an honest read on whether to wait, use a scheme or pay the premium, the team at Finance Lab can walk you through your options.

Frequently asked questions