What Lenders Mortgage Insurance actually buys
The single most misunderstood cost in home lending: LMI protects the lender, not you. If you default and the property sells for less than the outstanding debt, the insurer covers the lender's shortfall — and can then pursue you for it. You pay the premium; the bank holds the policy.
When it applies and what drives the premium
LMI is generally triggered when you borrow more than 80% of the property's value (an LVR above 80%). The premium climbs steeply and non-linearly as LVR rises: the jump from 90% to 95% costs far more than the jump from 85% to 90%, because the insurer's risk rises sharply. Loan size compounds it, so on a large loan at 95% LVR the premium can run into tens of thousands of dollars.
Capitalising the premium — and its hidden cost
Most borrowers capitalise LMI by adding it to the loan rather than paying it upfront. That preserves cash at settlement, but you then pay interest on the premium for the life of the loan, and it pushes your starting LVR higher. A $15,000 premium capitalised into a 30-year loan at 6% costs roughly $17,000 in additional interest over the full term — more than doubling its real price.
The ways to avoid it
Three genuine routes: save a 20% deposit; use a guarantor (usually a parent securing part of the loan against their own property); or qualify for the federal first-home deposit guarantee (branded the Australian Government 5% Deposit Scheme since 1 October 2025), under which the government guarantees the portion above your 5% deposit and LMI is waived entirely. Since 1 October 2025 that scheme has unlimited places and no income caps, though property price caps still apply by region. Some lenders also waive LMI for particular professions.
Frequently asked questions
Is LMI refundable? Sometimes — some insurers and lenders offer a partial refund if you repay or refinance very early, typically within the first year or two on a sliding scale. It is a product-by-product policy rather than a statutory entitlement, so check your loan documents before relying on it.
Does LMI transfer if I refinance? No. It's tied to the specific loan, so refinancing above 80% LVR generally means paying a fresh premium — a strong reason to get under 80% before switching lenders.
Is LMI tax deductible? Not for an owner-occupied home. On an investment property it's treated as a borrowing cost, deductible over five years or the loan term, whichever is shorter.