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Low-deposit home loans and LMI: what Australian buyers should know

Christian Tucker
2 days ago
6 min read

Insights from AGFB · Checked 2 October 2026 · About 6 minutes

In brief

  • Lenders mortgage insurance (LMI) protects the lender, not you. It usually applies when you borrow more than 80% of the property's value.

  • The premium generally rises with the loan-to-value ratio (LVR) and loan size, and adding it to the loan means paying interest on it too.

  • LMI is usually not refundable, apart from a partial early refund under some policies, and can't be moved to a new lender.

  • A bigger deposit, a family guarantee, a professional waiver or the 5% Deposit Scheme may reduce or avoid it, each with conditions.

What is lenders mortgage insurance?

LMI is insurance a lender takes out in case a borrower can't repay and selling the property doesn't clear the debt. The cost is passed on to you, but it doesn't protect you or any guarantor. If the insurer pays the lender a loss, it may then seek to recover that shortfall from the borrower.

Whether you need it depends on your LVR: the loan as a share of the property's value. LMI usually applies above 80%, which is why a 20% deposit is the common target. A few lenders charge their own low deposit premium instead, which works in a similar way.

How much does LMI cost?

The premium is usually a percentage of the loan, and insurers say it depends mainly on the LVR and loan size rather than your job or credit score. A higher LVR generally means a higher rate on a bigger loan. One major insurer puts a typical premium at around 1% to 2% of the loan, but at the highest LVRs it can be well above that.

As a hypothetical illustration, take a $700,000 home. A 10% deposit means a $630,000 loan at 90% LVR, and a premium rate of 2% would cost $12,600. A 5% deposit means a $665,000 loan at 95% LVR, and at 4% the premium would be $26,600.

Halving the deposit adds $35,000 to the loan but, in this example, about $14,000 to the premium. Stamp duty is also charged on LMI premiums and varies by state. In Queensland, insurance duty is 9% of the GST-inclusive premium.

Paying upfront or adding it to the loan

Most lenders let you pay LMI at settlement or add it to the loan, known as capitalising it. Adding it keeps cash in your pocket, but you pay interest on the premium for as long as it stays in the loan.

Take the hypothetical $26,600 premium at a hypothetical 6.5% over 30 years. It adds about $168 a month and around $34,000 in interest, so over the full term it would cost roughly $60,000.

Capitalising also lifts your LVR. Here the loan becomes $691,600, close to 99% of the price, and lenders set limits on how high that can go. Paying upfront avoids the interest, but uses cash you may want as a buffer.

Is LMI refundable or portable?

Usually not. Some policies give a partial refund if you repay and close the loan early, typically within the first 12 months and sometimes up to 24 months, depending on the policy and when the loan settled. A refund generally doesn't apply if the loan is in default.

LMI can't be transferred to a new lender. If you refinance before you have about 20% equity, the new lender may require a new premium. Some insurers credit the original premium if you later increase the loan with the same lender.

Ways to avoid or reduce LMI

A larger deposit

A bigger deposit lowers the LVR, which can reduce both the premium rate and the amount it applies to. A 20% deposit usually avoids LMI altogether, and even moving from 95% to 90% can make a real difference.

A family guarantee

A family member, often a parent, offers equity in their own property as extra security for part of your loan. That can bring your LVR low enough that LMI isn't needed. The guarantee is often limited to a set amount and can usually be released once you reach around 20% equity, subject to the lender's approval.

If you can't pay, the guarantor may have to pay and could lose their property, so they should get independent legal and financial advice before signing.

Professional LMI waivers

Some lenders waive LMI for eligible professionals, most often in medicine, dentistry and allied health, law, and accounting or finance, usually with current registration or membership of the relevant professional body. The maximum LVR, eligible roles, income requirements and loan types vary between lenders and change from time to time.

The 5% Deposit Scheme

Under the Australian Government 5% Deposit Scheme, run by Housing Australia, eligible first home buyers can buy with a 5% deposit, and eligible single parents or legal guardians with 2%, without paying LMI. Price caps and other conditions apply, and we cover the scheme in a separate article.

Genuine savings: what lenders look for

APRA's guidance notes that banks typically expect the deposit to come mainly from the borrower's own funds. Genuine savings usually means money you have saved or held yourself, commonly for at least three months and often around 5% of the price. Requirements tend to be stricter at higher LVRs.

Savings and term deposits usually count, and some lenders accept shares or a solid rental history. Policies on gifts and grants differ, so expect to show where every part of the deposit came from.

The risks of a low deposit

Thin equity. With a small deposit and LMI added to the loan, you may start with very little equity. Purchase and selling costs don't add value, so selling within a few years could leave you with little or nothing even if prices hold steady.

Negative equity. If values fall, you could owe more than the home is worth. That can make it hard to refinance or sell without topping up the difference yourself.

Smaller buffers. A bigger loan means bigger repayments, and putting every dollar into the deposit can leave little for repairs or a change in income. Moneysmart suggests checking your costs if interest rates rose by 2%.

A checklist before you apply

  • Work out your LVR at a few deposit levels, using a realistic valuation.

  • Get an LMI estimate, including stamp duty, for each scenario before you make an offer.

  • Compare paying upfront with adding it to the loan, including interest over the term.

  • Check whether the 5% Deposit Scheme, a professional waiver or a family guarantee could apply.

  • Have statements showing your deposit building over at least three months, and evidence for any gifted funds.

  • Keep a cash buffer for after settlement.

  • Consider whether you might refinance or sell before reaching 80% LVR.

Common questions

Does LMI cover me if I can't make my repayments?

No. It covers the lender's loss if the property is sold for less than the debt, and the insurer may then pursue you for that amount. If repayments become hard, contact your lender early.

Is it worth paying LMI to buy sooner?

It can be, depending on your situation. Weigh the full cost, including any interest, against what waiting could cost, such as more rent or price changes, and make sure the repayments leave room in your budget.

Try the numbers

Use our Borrowing Capacity calculator for an indicative loan size, and the Property Fees calculator to estimate transfer duty and other purchase costs. If you are unsure where to start, Find Your Next Step points you to the right tool or enquiry, and our first home buyers page explains how Christian can help you compare low-deposit options.

Talk it through

If you would like to compare low-deposit options, Christian can talk it through with you.

Sources

General information only. This article does not take into account your objectives, financial situation or needs. Your full financial situation and requirements must be considered before any offer or acceptance of a loan product. It is not tax or legal advice; speak with your accountant or adviser. All lending is subject to the lender's assessment and criteria, and fees and charges apply. Figures and rules are correct as at the checked date shown and can change.

Avantgarde Financial Brokerage Pty Ltd, Corporate Credit Representative 580346, authorised under Australian Credit Licence 389328 held by Connective Credit Services Pty Ltd.

BUYING WITH A SMALLER DEPOSIT?

See what you could borrow in the borrowing capacity calculator and how Christian helps first home buyers compare deposit options, LMI and guarantor loans. No credit check to enquire. Christian replies the same business day.

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