In short: Lenders mortgage insurance (LMI) is a one-off premium most lenders charge when you borrow more than 80% of the property’s value. It protects the lender, not you. First home buyers can often skip it through the government’s 5% Deposit Scheme, and some lenders waive it for certain professions.

Saving a 20% deposit plus stamp duty takes most Melbourne buyers years. On a $700,000 place that’s $140,000 before you’ve paid a cent of duty.

Paying for Lenders Mortgage Insurance is a common way around this problem, allowing borrowers to take out a loan with a smaller deposit.

In this blog, I’ll break down what Lenders Mortgage Insurance is and whether it’s a necessary cost when financing your home.

What is Lenders Mortgage Insurance?

LMI is an insurance policy that protects the lender from financial loss if the borrower is unable to make the repayments on their home loan.

In the case that a borrower defaults, the lender will often try to recover their money by putting the property back on the market. If the property sells for less than the unpaid value of the mortgage, the lender risks making a loss on that loan.

That’s why 80% is the magic number. Borrow more than 80% of the value (an LVR above 80%) and most lenders want insurance to cover that risk.

For a home buyer to take out a loan with a deposit less than 20%, the lender will want a guarantee if you are unable to meet your mortgage repayments.

Enter Lenders Mortgage Insurance (LMI).

Lenders can claim on an LMI policy to cover the difference of what they are owed on a loan. Because the mortgage insurance company insures the lender against the borrower’s risk, they are more likely to approve a loan without requiring a substantial deposit.

Here’s the part people miss: LMI only protects the lender. It won’t cover the borrower (or a guarantor) if they default on their loan, even though they usually carry the cost of the policy.

The cost of LMI is typically paid up front, with some lenders allowing it to be added onto the home loan (also known as ‘capitalising’).

How does Lenders Mortgage Insurance help?

Although you are paying for an insurance policy that won’t actually cover you if things go wrong, LMI will allow you to borrow more.

When you can’t get your loan to value ratio (LVR) under 80%, an LMI policy might be the easiest way to finance the home that you are after. With Lenders Mortgage Insurance, a borrower may only need a deposit as low as 5% to take out a home loan.

For many first home buyers who are unable to save up the 20% deposit, LMI is a necessary expense to help them break into the market sooner.

The premium goes up with your LVR and the size of the loan. Borrowing 95% costs a lot more than borrowing 85%, so even a few extra months of saving can make a real difference.

Should I get Lenders Mortgage Insurance?

Whether or not you should get Lenders Mortgage Insurance will depend on your individual circumstances.

First home buyers should look at the Australian Government 5% Deposit Scheme first. Since 1 October 2025 there are no income caps or limits on places, and in Melbourne and Geelong the property price cap is $950,000 ($650,000 in regional Victoria). The government guarantees part of the loan, so you can buy with a 5% deposit and pay no LMI.

Some lenders also waive LMI for certain professionals, such as doctors, lawyers and accountants, at up to 90% LVR or more. See home loans for accountants for how that works.

For others, LMI might be the fastest way to enter the property market, letting you take advantage of growing house prices without years of saving up a deposit.

A bigger loan can be the difference between buying where you want to live versus buying where you can afford.

Just remember the RBA lifted the cash rate to 4.85% on 3 November 2026. Lenders test whether you could still pay at a rate at least 3% above your actual rate, so a bigger loan has to pass that test too.

On the other hand, LMI will increase your debt and therefore the interest you’ll need to pay. If you add the premium to the loan (capitalise it), you also pay interest on it for the life of the loan.

You should also be factoring in your ability to pay off the debt. Taking out a loan that stretches yourself too thin can put you at great risk during times of financial hardship.

If you’re not wanting to pay for LMI and haven’t yet acquired a deposit worth 20%, it might be best to hold off buying property for the time being.

With all the excitement that comes with a property purchase, your first priority should be ensuring the financial safety of you and your family. Know your capacity to repay the loan and plan for scenarios in which your personal or employment situation changes.

Not sure whether to pay LMI, use the scheme or wait? Check what you can borrow with our borrowing power calculator, then book a chat with Gav.

Frequently asked questions

Is LMI refundable if I sell or refinance?

Usually not. LMI is generally a one-off premium, and most policies give little or nothing back if you refinance or sell early.

Can I avoid LMI with less than 20% deposit?

Yes, in some cases. Eligible first home buyers can use the 5% Deposit Scheme, some lenders waive LMI for certain professions, and a family guarantee can also help.

Can I add LMI to my home loan?

Many lenders let you capitalise it, which means adding it to the loan. You then pay interest on it, so the real cost is higher than the premium.

Last updated: 7 November 2026.

General information only. This article does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and seek personal advice before acting. Elephant Financial Pty Ltd trading as Elephant Advisory is an authorised credit representative (ACR 487962) of Yellow Brick Road Aggregation Pty Ltd (formerly Vow Financial Pty Ltd) (ABN 66 138 789 161), Australian Credit Licence 390261.