For many Australians, the biggest obstacle to buying a home isn’t the loan approval — it’s saving the deposit. If you’re looking to buy a home with little or no deposit, you’ll quickly come across a term that could significantly affect your borrowing power and upfront costs: Lenders Mortgage Insurance (LMI).
Whether you’re a first home buyer, using a guarantor, or applying for a low deposit home loan, understanding how LMI works — and how to avoid it — can save you tens of thousands of dollars. In this article, we’ll explain what LMI is, when it applies, how much it costs, and what your options are when buying with a small or no deposit.
What Is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is a type of insurance that protects the lender, not the borrower, when you borrow more than 80% of a property’s value — also known as a loan-to-value ratio (LVR) above 80%.
If a borrower defaults on their mortgage, and the property sale doesn’t cover the outstanding loan, the lender can claim on the LMI policy to cover the shortfall.
This insurance does not protect you, the buyer. It’s a cost you pay, but a benefit the lender receives. For that reason, it’s one of the most misunderstood and controversial aspects of low deposit home loans in Australia.
When Do You Have to Pay LMI?
You’ll usually be required to pay LMI if:
- You borrow more than 80% of the property’s value
- You don’t have a guarantor providing additional security
- You are using a gifted deposit with no genuine savings
- Your credit profile has blemishes or limited financial history
Some banks or non-bank lenders may have stricter requirements depending on the type of property (e.g. off-the-plan apartments) or the loan amount.
Even first home buyers applying under government schemes must understand how LMI applies in their situation.
How Much Does LMI Cost?
LMI costs vary based on:
- Loan amount
- Deposit size (or LVR)
- Whether you’re a first home buyer
- The lender’s specific insurer (e.g., Genworth or QBE)
To give you an idea, here are some rough examples:
| Property Price | Deposit | Loan Amount | Estimated LMI |
|---|---|---|---|
| $600,000 | 10% ($60,000) | $540,000 | ~$9,500 |
| $700,000 | 5% ($35,000) | $665,000 | ~$20,000 |
| $500,000 | 0% (Guarantor) | $500,000 | $0 (No LMI due to guarantor) |
LMI can be paid upfront or capitalised into your loan, which means it gets added to your total mortgage amount. While this reduces your upfront costs, it also means you’ll pay interest on the LMI over the life of the loan.
How Can You Avoid Paying LMI?
If you’re trying to buy a house with no deposit, avoiding LMI becomes even more important, as the cost can significantly increase your borrowing amount. Here are your main options to avoid or reduce LMI.
1. Use a Guarantor Loan
A family guarantee home loan allows a parent or close relative to use the equity in their home as additional security. Because the lender is not taking on extra risk, LMI is waived.
This is one of the most popular ways for first-time buyers with no deposit to avoid LMI and still secure a competitive interest rate.
2. Qualify for the First Home Guarantee Scheme
The First Home Guarantee Scheme allows eligible buyers to purchase with as little as 5% deposit without paying LMI. This government program essentially acts as the guarantor for the lender, covering the remaining 15% of the deposit requirement.
Not all lenders are part of the scheme, so it’s important to check with a broker or visit the National Housing Finance and Investment Corporation (NHFIC) website to find participating banks.
3. Save at Least 20% Deposit
This is the traditional method — save a 20% deposit, and you won’t pay LMI. While not possible for everyone, even saving a 15–18% deposit may reduce LMI significantly, even if you can’t avoid it entirely.
4. Buy a Cheaper Property
Reducing your purchase price reduces your required deposit and LMI fees. Many buyers explore regional property markets, where prices are more affordable, and grants are more generous.
Is Paying LMI Always a Bad Thing?
Not necessarily.
In many cases, LMI can be a strategic tool that allows buyers to enter the market sooner, especially when property prices are rising. For example, paying $10,000 in LMI today might be better than waiting two years to save a deposit while home values increase by $50,000 or more.
For first home buyers, LMI can be the difference between owning a home now or continuing to rent indefinitely.
Always weigh the cost of LMI against the cost of waiting.
Does LMI Affect Loan Approval?
No, LMI is not a deciding factor in whether you’re approved for a loan. However, your LVR and credit profile do affect the lender’s risk assessment, which indirectly affects whether they will approve a loan with LMI.
High-risk applications (e.g. high LVR, unstable income, or credit defaults) may be rejected even with LMI. That’s why it’s critical to:
- Maintain a stable income
- Minimise personal debts
- Show a history of rental payments or savings
- Have clean credit reports
LMI Refunds and Portability
Some lenders offer partial LMI refunds if you refinance or repay the loan early within the first 12–24 months.
LMI is generally not transferable between lenders. If you refinance and still owe more than 80% of the property’s value, you may be required to pay LMI again with the new lender.
Final Thoughts: Plan Ahead Before You Buy Without a Deposit
Buying a home in Australia without a deposit is more possible than ever, especially with options like guarantor loans and the First Home Guarantee Scheme. However, one of the biggest costs you’ll encounter is Lenders Mortgage Insurance — and the more you understand it, the better prepared you’ll be to make the right decision.
Whether you choose to avoid LMI through a family guarantee or accept the cost in exchange for getting into the market sooner, make sure you:
- Compare lenders and LMI calculators
- Consider speaking with a mortgage broker
- Understand all associated fees, repayments, and risks
Need Help Navigating LMI?
A mortgage broker can walk you through your borrowing capacity, LMI estimates, and lender policies — and help you access loans with no deposit and no LMI if you qualify.
Disclaimer: This article is general in nature and does not constitute financial advice. Always consult a licensed mortgage broker or financial advisor before making lending decisions.