LMI for First Home Buyers: What Is Lenders Mortgage Insurance and Do You Have to Pay It?
If you're a first home buyer, refinancer or property investor, you've probably heard the term LMI.
LMI is bank jargon for for Lenders Mortgage Insurance, and it can be one of the biggest additional costs you come across when applying for a home loan with a smaller deposit. Everyone talks about a 5% deposit, but they don’t talk about 5% deposit PLUS LMI (if it is needed)
But there's a common misconception about LMI. Many first home buyers assume:
“If I have to pay LMI, I'm getting a bad home loan.”
That's not necessarily true.For some buyers, paying LMI can be the difference between buying their first home now and spending several more years trying to save a larger deposit. Think about it this way…. if you didn’t pay the LMI, and waited 4 more years to save the 20% deposit, you may have paid 4 more years of rent and the housing prices may have gone up again… it can be a never ending circle. LMI isn’t bad, it’s a helpful tool for some people.
For some clients, there may be a way to reduce or avoid LMI altogether. Let’s talk about schemes and grants and Guarantors in some of our other blog posts. For now, we’re just talking about LMI.
The important thing is understanding how LMI works, how much it could cost and what alternatives may be available for your circumstances.
What is LMI?
Lenders Mortgage Insurance is insurance that protects the lender, not the borrower. (Sadly)
It is generally associated with home loans where the borrower has a higher loan-to-value ratio (LVR), often when borrowing more than 80% of the property's value.
If the borrower defaults on the loan and the sale of the property doesn't cover the outstanding debt and associated costs, LMI can protect the lender against some of that loss.
Importantly, LMI does not protect you if you can't repay your mortgage.
It protects the lender. Another misconception is that the LMI provider (sometimes the bank, sometimes an external insurer) will just pay the money to the bank in the event of default. That is true, however they have the right to come after the borrower (you) to get their money back.
Despite this, LMI can allow lenders to offer loans to borrowers who don't have a traditional 20% deposit. And that's particularly relevant to first home buyers or buyers who have been out of the market for some time and do not have a full deposit again. Investors can also use LMI for investment purchases, although the rules can be a little stricter for investment home loans with LMI.
Do first home buyers have to pay LMI?
No.
Being a first home buyer doesn't automatically mean you'll pay LMI.Whether LMI applies depends on factors including your deposit, LVR, lender and loan structure.
As a general guide, if you're borrowing more than 80% of the property's value, LMI may apply.
However, there are circumstances where eligible first home buyers can borrow with a smaller deposit without paying LMI.
For example, the Australian Government's First Home Guarantee can allow eligible first home buyers to purchase with a minimum 5% deposit, with the government guarantee allowing a participating lender to lend up to 95% of the property's value without the borrower paying LMI. Eligibility requirements and property price caps apply.
So the question shouldn't simply be:
“How do I avoid LMI?”
It should be:
“What is the most appropriate way for me to structure my home loan?”
How much deposit do I need to avoid LMI?
A 20% deposit is the traditional benchmark.
For example, if you were buying a $600,000 property:
20% deposit = $120,000
That would leave you borrowing $480,000, which is an 80% LVR.
At that level, you would generally avoid LMI, subject to the lender's policy, location of the property and other lender metrics.
But saving $120,000 can take a long time.
And this is where the decision becomes more complicated for first home buyers.
You could spend years trying to reach a 20% deposit while property prices change, or you could potentially buy with a smaller deposit and accept the cost of LMI.
There isn't one answer that is right for everyone.
Example: 5% deposit vs 20% deposit
Let's say you're looking at a $600,000 property.
With a 20% deposit:
Deposit: $120,000
Loan: $480,000
LVR: 80%
LMI: generally not applicable
With a 5% deposit:
Deposit: $30,000
Loan: $570,000
LVR: 95%
LMI: may apply unless an exemption or government guarantee is available
The difference in deposit is $90,000.
That's a substantial amount of money for a first home buyer to save.
But the 5% deposit option doesn't necessarily mean the cheaper overall loan.
You'd be borrowing more money, potentially paying LMI and paying interest on a larger loan.
That's why the numbers need to be looked at as a whole.
How much does LMI cost?
There isn't one standard LMI amount.
The cost can vary depending on factors such as:
The amount you're borrowing
Your LVR
The property's value
The lender
The loan structure
Whether the LMI is capitalised into the loan
The insurer's pricing
This means you shouldn't rely on a generic online LMI figure when deciding how much you need to save.
The actual premium for your proposed loan should be calculated as part of the application.
And this is where LMI can become particularly interesting.
A small change in your LVR can sometimes have a meaningful impact on the amount of LMI you're paying.
Why your LVR matters
LVR stands for Loan-to-Value Ratio.
It's essentially the amount you're borrowing compared with the value of the property.
For example, if a property is valued at $700,000 and you're borrowing $560,000:
$560,000 ÷ $700,000 = 80% LVR
If you're borrowing $630,000:
$630,000 ÷ $700,000 = 90% LVR
The higher the LVR, the more you're borrowing relative to the property's value.
And once you move into higher-LVR territory, LMI can become a significant cost. LMI is calculated in tiers, so the difference for an 89% loan compared to a 90% loan can be a lot, as you are in a lower tier in the 89% section. Little things like this are where a mortgage broker can add real value to your home buying conversation.
But here's something first home buyers sometimes overlook:
The purchase price isn't necessarily the same thing as the lender's valuation.
What happens if the valuation is lower than the purchase price?
Imagine you've agreed to buy a property for $700,000.
But the lender's valuation comes in at $680,000.
The lender may assess the LVR using the valuation rather than simply assuming the property is worth what you've agreed to pay.
That can change the amount you need to contribute.
This is one reason we encourage first home buyers to understand the valuation process before assuming that their deposit will be enough.
It becomes even more important when you're building a home.
Construction costs don't necessarily translate dollar-for-dollar into the finished property's market value.
We've seen this firsthand.
In one case involving first home buyers building in the Northern Territory, the valuation came in below the combined land and construction costs.
The clients already had a loan approval.
But the valuation pushed the proposed lending structure to around 91% LVR.
That resulted in approximately $50,000 of LMI under their original lender's structure.
By reviewing the application across the lending market, we found another lender that was able to structure the loan closer to 89% LVR.
The result?
The clients' LMI reduced by approximately $20,000.
And their interest rate also reduced from 7.49% to a rate in the low 6% range.
You can read the full story here:
How the Right Construction Lender Saved Our First Home Buyers Thousands
Can first home buyers avoid LMI with a 5% deposit?
Potentially.
The Australian Government's First Home Guarantee is designed to help eligible home buyers purchase with a smaller deposit.
Under the scheme, eligible first home buyers can purchase with a minimum 5% deposit + costs, with Housing Australia providing a guarantee to a participating lender that can enable borrowing up to 95% of the property's value without the borrower paying LMI.
However, the government guarantee doesn't mean the government is giving you a 15% deposit.
It is a guarantee to the participating lender.You still need to meet the scheme's eligibility requirements and the lender's normal credit assessment.Property price caps and other conditions can also apply.
So don't assume that simply being a first home buyer automatically qualifies you.
Is paying LMI a bad idea?
Not necessarily.
This is one of the biggest points we try to explain to first home buyers.
LMI is a cost.
But sometimes a cost can make financial sense.For example, imagine you have a 10% deposit but property prices in the area you're looking at are rising faster than you're able to save.
You could spend several years trying to reach 20%. Paying rent in the meantime, housing price uncertainty.
Or you could potentially buy sooner, pay LMI and start building equity in the property.
That doesn't automatically make buying sooner the better decision.
Property prices can fall.
Interest rates can change.
Your circumstances can change.
And taking on a larger mortgage means larger debt.
But it demonstrates why “never pay LMI” isn't necessarily good mortgage advice.
The right question is whether the overall strategy makes sense for you.
When avoiding LMI might make sense
Avoiding LMI may be attractive if:
You already have a substantial deposit
You can reach 20% without significantly delaying your purchase
You want a lower loan balance
You want to minimise upfront borrowing costs
You have enough savings to cover your deposit and other buying costs
But there are also situations where waiting for 20% could leave you worse off.
For example, you might have enough money for a 10% deposit today but need several more years to save another 10%.
During that time, the property you're targeting could increase in price.
This is why we don't treat 20% as a magic number.
What about using all my savings to avoid LMI?
This is another important consideration.
Let's say you've saved $100,000.
You could potentially use the money to increase your deposit and reduce or eliminate LMI.
But what happens after settlement?
You may have very little cash left.
That's not necessarily a great position to be in.
Home ownership comes with unexpected expenses.
You might need to pay for:
Moving costs
Furniture
Appliances
Repairs
Insurance
Rates
Maintenance
Unexpected bills
A first home buyer with a smaller deposit but a healthy cash buffer can sometimes be in a stronger practical position than someone who puts every available dollar into the property simply to avoid LMI.
The goal isn't just to get through settlement.
It's to remain financially comfortable after settlement.
Can LMI be added to the home loan?
Depending on the lender and loan structure, LMI may be able to be capitalised into the loan rather than paid entirely upfront.
This can reduce the amount of cash you need at settlement.
But there is an important trade-off.
If you add LMI to the loan, you're borrowing the cost rather than paying it upfront.
That means you'll generally pay interest on that additional amount over the life of the loan unless you pay it down sooner.
So while capitalising LMI can help with your upfront cash position, it doesn't make the LMI free.
The lender needs to assess whether the resulting loan remains within its lending limits.
What if one lender's LMI is much higher than another's?
This is where lender policy becomes particularly important.
First home buyers sometimes assume that all lenders will calculate their loan the same way.
They don't.
Different lenders can have different:
LVR policies
LMI arrangements
Property policies
Servicing calculations
Interest rates
Government scheme participation
Credit policies
This means the same borrower can potentially receive very different outcomes depending on which lender assesses the application.
That's one of the reasons a mortgage broker can be valuable.
The job isn't simply to find a lender that says yes.
It's to compare the overall structure.
LMI vs saving a bigger deposit
For first home buyers, the decision often comes down to a trade-off.
Option 1: Save a larger deposit
Potential advantages:
Lower loan amount
Potentially lower interest costs
Potentially no LMI
More equity from day one
Potential disadvantages:
It may take longer to buy
Property prices may change while you're saving
You may use a large portion of your available savings
Option 2: Buy with a smaller deposit
Potential advantages:
You may buy sooner
You may keep more cash available
You may be able to take advantage of government schemes
You may enter the property market earlier
Potential disadvantages:
You may pay LMI
You'll generally have a larger loan
Your repayments may be higher
You may have less initial equity
Neither option is automatically better.
It depends on your circumstances.
What first home buyers should ask about LMI
Before deciding how much deposit to save, ask:
1. What would my LVR be?
Understanding your LVR helps you understand how the lender may view the loan.
2. How much would my LMI actually be?
Don't rely on a generic estimate.
3. Can I access a government scheme?
Eligible first home buyers may be able to avoid LMI through the First Home Guarantee.
4. What happens to my interest rate at a higher LVR?
A lower deposit can sometimes affect more than just LMI.
5. How much cash will I have left after settlement?
Don't forget your emergency buffer.
6. What happens if the valuation is lower than expected?
This can affect the amount of money you need to contribute.
7. Are there other lenders with a better overall structure? Can I use LMI for Investment Loans
The lender with the lowest advertised rate isn't necessarily the lender with the best outcome for your circumstances. LMI is available for investment loans, but the rules can change slightly. It’s best to get this tailored into your mortgage conversation.
The cheapest loan isn't always the loan with no LMI
This is perhaps the biggest takeaway for first home buyers.
LMI is a cost.
But so is waiting.
So is borrowing more.
So is paying a higher interest rate.
And so is using every dollar of your savings to avoid LMI.
The right question is not:
“How do I avoid LMI at all costs?”
It's:
“What lending structure leaves me in the strongest overall position?”
Sometimes that means saving a bigger deposit.
Sometimes it means using a government scheme.
Sometimes it means paying LMI and buying sooner.
And sometimes, as we've seen with our own clients, it means finding a lender whose policy produces a significantly better result.
Buying your first home?
If you're a first home buyer, don't assume you need to save 20% before speaking to a lender.
And don't assume that paying LMI automatically means you've chosen the wrong loan.
Your deposit, LVR, LMI, interest rate, borrowing capacity, valuation and cash buffer all need to be considered together.
At The Broker Society, we help first home buyers compare lending options across different lenders and understand how the overall structure could affect the cost of buying their first home.
Because getting approved is one thing.
Getting the right structure is another.
Related first home buyer guides
How Much Deposit Do I Need to Buy My First Home?
How Much Can a First Home Buyer Borrow?
Does HECS-HELP Debt Affect Your First Home Loan?
First Home Buyer Government Schemes Explained
What Is a Property Valuation and Why Does It Matter?
Pre-Approval vs Formal Home Loan Approval
How the Right Construction Lender Saved Our First Home Buyers Thousands
Important Information
This article was written by Kate Sadler, Mortgage Broker – Noosaville, on 11 August 2026 and was current at the time of writing. Lending policies, rates, fees and government requirements can change.
This information is general in nature and does not take into account your individual circumstances. The Broker Society does not guarantee loan approval, a particular rate or any specific savings. Outcomes depend on individual circumstances and the lending options available at the time.
Please consider your circumstances and seek appropriate professional advice before making any financial decision.
