Lender Guide
Understanding Lenders Mortgage Insurance (LMI)
LMI is one of the most misunderstood costs in home lending — but it plays a major role in how Australians enter the property market sooner.
Lenders Mortgage Insurance (LMI) is a policy that protects the lender — not the borrower — when a home loan is issued with a smaller deposit.
What is LMI?
LMI is an insurance policy taken out by the lender when a borrower has less than a 20% deposit.
It protects the bank if the borrower defaults and the property is sold for less than the outstanding loan balance.
Who pays for LMI?
Even though LMI protects the lender, the cost is usually paid by the borrower and can often be added to the loan.
Learn more about improving your position before applying: improve borrowing capacity
When is LMI required?
LMI is generally required when your loan-to-value ratio (LVR) is above 80%, meaning you are borrowing more than 80% of the property’s value.
This usually applies to borrowers with deposits under 20%, although there are important exceptions under government-backed schemes.
First home buyers: 5% deposits and no LMI (Government Guarantee Scheme)
Some first home buyers in Australia may be able to purchase a property with as little as a 5% deposit without paying Lenders Mortgage Insurance (LMI).
This is possible under the Australian Government’s First Home Guarantee (Housing Australia scheme), where the government guarantees a portion of the loan to reduce lender risk.
Because of this guarantee, LMI is not required in eligible cases.
Eligibility conditions include:
- Property price caps (vary by state and region)
- First home buyer eligibility rules
- Owner-occupier requirement
- Use of participating lenders only
Key Insight
The First Home Guarantee does not have income caps under current rules. Eligibility is determined mainly by property price limits, residency status, and lender participation.
Explore related options: HomeStart Finance
Why LMI exists
LMI allows borrowers to enter the property market sooner without waiting to save a full 20% deposit.
It also enables lenders to manage risk when lending at higher LVRs.
Key Insight
LMI is not a penalty — it is a risk mechanism that enables low-deposit lending in Australia.
How to avoid or reduce LMI
- Saving a 20% deposit
- Using a guarantor loan
- Eligible government guarantee schemes
- Improving borrowing capacity through structuring
Related resources
Buying property guide
Fixed vs variable rates
Stamp duty in SA
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