Lender's Mortgage Insurance Guide

What LMI protects and covers

Lender's Mortgage Insurance is a policy that protects mortgage lenders against financial loss if borrowers default on their home loans. Despite borrowers paying the premium, LMI provides no protection to the borrower and exists solely to protect the lender's interests.

When LMI requirements apply

Most lenders require LMI when your loan-to-value ratio exceeds 80%, meaning you're borrowing more than 80% of the property's value. Some lenders may require LMI at lower LVR levels depending on loan type and borrower circumstances.

• Standard requirement when LVR exceeds 80% (deposit less than 20%)
• Some lenders require LMI at 75-80% LVR for certain loan types
• Investment property loans may require LMI at lower LVR levels
• Low documentation loans often have stricter LMI requirements
• Borrower employment type and income stability may affect requirements

How LMI calculations work

LMI premiums are calculated based on several risk factors, with higher risk scenarios resulting in higher premium costs. The main factors affecting LMI costs include loan amount, LVR percentage, property type, and borrower characteristics.

Primary cost factors:

• Loan-to-value ratio percentage (higher LVR = higher premium)
• Total loan amount (larger loans = higher dollar premiums)
• Property type (houses vs units, investment vs owner-occupied)
• Borrower employment type (PAYG vs self-employed vs contract)
• Geographic location and postcode risk assessment

Typical premium ranges:

• 85% LVR: $3,000-$6,000 for average loan amounts
• 90% LVR: $6,000-$12,000 depending on loan size and risk factors
• 95% LVR: $12,000-$20,000+ for larger loans and higher risk profiles

Payment options and strategies

Borrowers can choose how to pay their LMI premium, with each option having different cost implications over the loan term.

Capitalizing LMI (adding to loan): Most borrowers choose to add the LMI premium to their loan amount, avoiding large upfront costs but paying interest on the premium amount over the loan term.

Paying LMI upfront: Paying the premium as a lump sum at settlement avoids interest charges on the premium amount, resulting in lower total cost but requiring additional cash at settlement.

LMI exemptions and alternatives

Certain borrowers can access high LVR loans without standard LMI requirements through professional packages or alternative arrangements.

Professional package exemptions: Many lenders offer LMI waivers or reduced requirements for qualified professionals including medical practitioners, legal professionals, accountants, and other recognized professions. These packages may allow borrowing up to 90-95% LVR without LMI.

Government guarantee schemes: First home buyer guarantee schemes effectively replace LMI with government guarantees, allowing eligible buyers to access high LVR loans without paying LMI premiums.

Family pledge or guarantee arrangements: Using family property as additional security can eliminate LMI requirements by reducing the effective LVR of your loan.

Strategies for avoiding LMI

Several strategies can help borrowers avoid or minimize LMI costs, potentially saving thousands of dollars in unnecessary premiums.

• Save larger deposit to reach 80% LVR threshold
• Use guarantor arrangements with family property security
• Access government first home buyer guarantee schemes
• Consider professional package options if eligible
• Choose lower-priced properties to reduce LVR with available deposit

LMI vs international comparisons

Australia's LMI system differs from mortgage insurance arrangements in other countries, particularly regarding borrower benefits and cancellation rights.

Australian LMI protects lenders exclusively and cannot be cancelled by borrowers, unlike the United States' Private Mortgage Insurance (PMI) which can be cancelled once certain LVR thresholds are reached.