Understanding Lenders’ Mortgage Insurance (LMI)

 Last updated: 22 May 2024 |  Estimated read time: 4 Minutes

Some lenders will approve a home loan with less than a 20% deposit, but you’ll probably need to pay extra fees – one of the most common being Lender’s Mortgage Insurance (LMI).

Saving a 20% deposit can be a big hurdle to getting on the property ladder – especially if you’re also battling the rising cost of living and increasing house prices. In some cases, you may be able to fast-track your property buying journey by getting a home loan with a smaller deposit, but you’ll need to balance the possible benefits of buying sooner with the cost of extra fees like Lenders Mortgage Insurance. 

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance – or LMI – is a type of risk fee designed to protect a lender against the added risks involved in lending over 80% of the total value of your home. That’s because if you were to default on your home loan repayments and the lender had to sell your property, it may be harder for them to recover the full cost.

LMI is usually calculated as a percentage of the value of your loan amount and it’s either paid as a one-off fee during settlement or added to your regular loan repayments. 

How is LMI calculated?

The amount of LMI you’ll pay depends on a few different things, like your lender’s terms and conditions and your loan to value ratio (LVR) – the percentage of the total value of your property that you want to borrow.

Typically the higher your LVR, the higher your LMI – so if you put down a 10% deposit, you’ll typically pay less LMI than if you only have 5%. Other factors can also affect your LMI costs – like if you received your deposit as a gift rather than saving it yourself, if you’re self-employed or work for someone else, and if you’re buying the property as an investment or to live in.

Watch this short video to learn more about LVR and how it affects LMI.

Saving the deposit for your first place can be daunting. Most lenders won't talk to you unless you've saved up at least 10% of the property price, plus the money to cover government and legal fees. Many lenders also keep their best home loan deals for those who have at least a 20% deposit. 

With today's house prices, that's some serious money that you'll need to save. You'll hear loan to value ratio or LVR a lot when you're comparing home loans. Thankfully, it's easy to understand. It's just the amount you need to borrow compared to the price you're paying for your property. So the larger your deposit, the lower the LVR.

This will determine what lenders you can apply to, what interest rates you'll be eligible for, and what risk fees you might have to pay. 

Risk fees, yeah, you heard that right. If you're applying for a loan with an LVR above 80 which means you've got less than a 20% deposit, you'll often need to pay Lender's Mortgage Insurance or a similar risk fee. These fees can range from a few thousand dollars to tens of thousands of dollars depending on the lender and your property price. 

This protects the lender in case you default on the loan and they need to sell the property at a loss. While there isn't any direct benefit to the borrower, it does mean you can get on the property ladder with a smaller deposit.

As you save more towards a property, the LVR decreases and home loans usually become more competitive. Say hello to better interest rates and lower or even no risk fees.  

So if you want to get the lowest interest rate possible and avoid paying LMI or a similar risk fee then you'll usually need to save up at least a 20% deposit and have an LVR of 80. 

However, with house prices rising, waiting to save up that extra deposit may see you priced out of the market, so you might consider it worth paying the extra fees to get your foot in the door sooner. You'll also need to keep some cash aside to pay for your legal and settlement fees, not to mention the cost of furnishing your property. It's a lot to weigh up. If you need any more hints and tips for your home loan journey then visit peppermoney.com.au. We're here to help. 

Tips to help avoid paying LMI

Paying LMI may help you get on the property ladder sooner, but you’ll need to factor in the potential extra costs. There are a few things you may consider doing to avoid paying LMI – depending on your financial circumstances and budget. 

Save a larger deposit

Look at your budget and see if you can put a bit extra away or wait a little longer until you have a 20% deposit. It may mean delaying buying a home, but it could save you in the long run.

Use a financial gift

While lenders like to see evidence of genuine savings, you may be able to use a windfall or financial gift like an inheritance to make your deposit up to 20% for some lenders – and avoid paying LMI as a result.

Take advantage of government schemes

If you’re a first home buyer and meet the criteria, you may be eligible for government assistance under schemes like the First Home Guarantee or the Shared Equity Home Buyer Helper.

Help for first home buyers

The First Home Guarantee is a Government scheme designed to help first home buyers who may not have a 20% deposit saved. If you’re eligible, part of your loan will be guaranteed by Housing Australia, so you can buy a home with as little as a 5% deposit without paying Lenders Mortgage Insurance.

Places on the scheme are limited each year and you’ll need to have between 5% and 20% of your deposit saved. The exact amount you’ll need varies between lenders and there are a few other criteria you’ll need to meet.

Not all lenders charge LMI

Fees and terms vary widely between different lenders, so it pays to do your research. At Pepper Money, we don’t charge LMI for borrowers with less than a 20% deposit. Instead we charge a Lender Protection Fee (LPF), which is a type of risk fee designed to protect us in case you’re not able to meet your mortgage repayments. This allows us to process your application faster as we don’t need to get approval from a third party provider, like we would with LMI. Read more about our home loan fees.

We’re here to help

Looking to buy a home but don’t have a 20% deposit saved? We offer flexible home loan options with as little as 5% deposit – get your indicative interest rate and repayments, apply online or speak to us to learn more.

Want to know how much you may be able to borrow? See how your purchase price and deposit stack up using our Loan to Value Ratio calculator. Remember, you'll need an LVR of 95% or less to apply for a home loan with us.


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