LMI Explained in Human Terms
Lenders Mortgage Insurance doesn't have to be confusing. Here's what it is, when you pay it, and how to avoid it.
Somebody has probably told you that you need a 20% deposit. They may not have told you why.
The why is Lenders Mortgage Insurance, and once you understand what it is, a lot of first home buyer advice starts making more sense.
It insures the lender, not you
That's the whole thing, and it's the part that surprises people.
If you borrow with less than a 20% deposit, most lenders require an insurance policy that pays them if you default and the sale of your house doesn't cover the debt.
You pay the premium. The lender is the one protected. If you default, the insurer pays the lender, and can then pursue you for the shortfall anyway.
It isn't a scam and it isn't hidden. It's just widely assumed to work the other way around.
What it costs
It depends on the size of your loan and how small your deposit is, and it climbs steeply as the deposit shrinks.
On a modest Melbourne house with a small deposit it has run past $20,000.
Most people don't pay it up front. It gets capitalised, meaning it's added to the loan balance. Which means you pay interest on it, for as long as the loan runs.
A $20,000 premium added to a thirty year loan costs you considerably more than $20,000.
Why this was the wall
This is why 20% became the folk wisdom. It was the point where LMI disappeared.
It was never a legal requirement. It was a risk threshold, and buyers reasonably decided that saving longer beat paying a five figure premium for nothing.
The trouble is that the advice outlived the maths. Prices rose faster than most people could save, so "wait until you have 20%" quietly became "wait forever".
How you avoid it now
The First Home Guarantee removes it entirely.
The federal government guarantees up to 15% of the property value on your behalf. You contribute 5%. The lender is covered to the same level it would be with a 20% deposit, so there's no LMI to charge.
You don't pay a fee for the guarantee. This is the closest thing to a free lunch in the whole first home buyer landscape.
Since October 2025 there are no income caps and no limit on places. The property price cap is $950,000 in Melbourne and Geelong.
So is LMI ever worth paying?
Sometimes, and it's worth being honest about that.
If you don't qualify for the guarantee, or you're buying above the price cap, paying LMI can still beat waiting another three years while prices move. The premium is a known number. Another three years of price growth isn't.
That's a calculation, not a rule, and it depends on your deposit, your borrowing power and what you're buying.
What to do with this
Work out whether the First Home Guarantee is available to you before you do anything else. If it is, LMI stops being part of your problem and your deposit target drops by tens of thousands.
The deposit and LMI calculator on this site will show you both scenarios side by side, with its working.
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