Lenders Mortgage Insurance
A one-off premium that protects the lender — not you — when you borrow more than 80% of a property's value.
If your deposit is under 20% of the purchase price, most lenders require Lenders Mortgage Insurance. It covers the bank's loss if you default and the property sells for less than the outstanding loan.
The premium is charged to you but insures the lender. If the bank claims on the policy, the insurer can still pursue you for the shortfall — so it buys you no protection whatsoever.
LMI is usually capitalised, meaning it is added to the loan rather than paid upfront. That is convenient, but it means you pay interest on the premium for the life of the loan, which can more than double its real cost.
Buying at $700,000 with a 10% deposit
Borrowing $630,000 against a $700,000 property could attract an LMI premium in the region of $18,000 to $25,000. Capitalised into a 30-year loan at 6%, that premium ends up costing far more than its sticker price.
The bit people get wrong
LMI is not portable. Refinance to another lender and you generally pay it again from scratch, which is why it often locks borrowers into their original bank until they build 20% equity.
Common questions
How do I avoid paying LMI?
Save a 20% deposit, use a guarantor, or check whether you qualify for a government scheme such as the Home Guarantee Scheme. Some lenders also waive LMI for particular professions.
Is LMI tax deductible?
On an investment property, LMI is treated as a borrowing expense and is generally deductible over five years or the life of the loan, whichever is shorter. On your own home it is not deductible.
Can I get a refund if I sell quickly?
Some insurers offer a partial refund if the loan is repaid within the first year or two, but the amounts are small and many policies offer nothing at all.
Run your own numbers