Top Strategies to Avoid LMI on Your Home Loan

Lenders Mortgage Insurance protects the lender if you borrow more than 80% of the property value and default on the loan.

The premium is paid upfront by you, the borrower, and can add several thousand dollars to the cost of buying a home. A borrower in Joondalup taking out a loan with a 90% loan to value ratio might pay between $8,000 and $15,000 in LMI, depending on the loan amount and the lender's insurer. That cost doesn't reduce your loan balance or build equity. It covers the lender's risk.

If you can avoid or reduce LMI, you keep more of your deposit working for you and reduce the total amount you need to borrow. That affects both your serviceability assessment and your ongoing repayments.

What Is Lenders Mortgage Insurance and When Does It Apply

LMI applies when your deposit is less than 20% of the property's value. The premium is calculated on a sliding scale based on the loan amount and the loan to value ratio. The higher the LVR, the higher the premium. Lenders require LMI to protect themselves against losses if the loan goes into default and the property is sold for less than the outstanding balance.

The premium is a one-off payment, typically added to the loan balance at settlement. Some lenders allow you to pay it upfront, though most borrowers capitalise it. Stamp duty on the LMI premium may apply depending on which state you're in. In Western Australia, no stamp duty applies to LMI premiums.

Consider a buyer purchasing a unit in Joondalup at a price within reach of the $850,000 cap under the Australian Government 5% Deposit Scheme. With a 10% deposit on a property valued at $700,000, the buyer would need to borrow $630,000, giving an LVR of 90%. Under a standard lender scenario, LMI might cost around $12,000. If the buyer increases their deposit to 20%, bringing the LVR to 80%, the LMI drops to zero. That $12,000 can be redirected toward furniture, renovations, or simply kept as a buffer.

Using the Australian Government 5% Deposit Scheme to Skip LMI

The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a deposit of as little as 5% without paying LMI. Housing Australia provides a guarantee to the participating lender of up to 15% of the property value, bringing the combined deposit and guarantee to 20%. The scheme has no income caps and no annual place limits. Applications are made through a participating lender, not directly through Housing Australia.

In Joondalup, the property price cap is $850,000 for capital cities and regional centres. Both the purchase price and the lender's assessed value must be at or below that cap. The scheme can be used with fixed rate, variable rate, or split loan structures depending on the lender. You can also combine the scheme with the WA First Home Owner Grant if you're buying or building a new home, and with the First Home Owner Rate concession for stamp duty relief.

A buyer purchasing a townhouse in Joondalup at $800,000 with a 5% deposit would need $40,000 upfront, plus settlement costs. Under the scheme, Housing Australia guarantees 15% of the property value, removing the need for LMI. Without the scheme, the buyer would face an LMI bill in the range of $20,000 to $30,000 on a 95% LVR loan. The saving is substantial, and the buyer enters the market sooner with less cash required at settlement.

Saving a Larger Deposit to Reach 20% and Avoid LMI Entirely

Increasing your deposit to 20% or more removes the need for LMI under any loan structure. This approach takes longer but gives you the widest choice of lenders and loan products. It also improves your serviceability, as the lower loan amount reduces the interest rate buffer calculation and the monthly repayment figure the lender uses to assess your application.

Some buyers in Joondalup benefit from using a guarantor, typically a parent, who offers the equity in their own property as additional security. The guarantor doesn't hand over cash but allows the lender to use their property as a form of second security. This can bring the effective LVR on your portion of the loan down to 80% or below, removing LMI. The guarantor is released from the guarantee once you've built enough equity through repayments or capital growth, usually within a few years.

Lender-Specific LMI Waivers for Certain Occupations

Some lenders offer LMI waivers or reduced premiums for borrowers in specific occupations, typically medical professionals, lawyers, accountants, and other regulated professions. These waivers may allow you to borrow up to 90% or even 95% of the property value without paying LMI. Eligibility criteria vary between lenders and may include minimum income thresholds, professional registration requirements, and restrictions on the type of property you can purchase.

These waivers are not advertised widely and are often only accessible through a mortgage broker who knows which lenders offer them and how to structure the application. A doctor working at Joondalup Health Campus buying a home in the suburb might qualify for an LMI waiver at 90% LVR, saving $10,000 or more compared to a standard applicant with the same deposit.

Splitting Your Loan to Reduce the LMI-Affected Portion

Some lenders allow you to split your loan into two portions, with the first portion at 80% LVR attracting no LMI and the second portion covering the remaining amount. LMI is charged only on the second portion, reducing the overall premium compared to a single loan at the higher LVR. This structure is not offered by all lenders, and the interest rate on the second portion may be slightly higher.

A buyer in Joondalup borrowing $680,000 on a property valued at $800,000 might split the loan into a $640,000 portion at 80% LVR and a $40,000 portion at 85% LVR. LMI applies only to the $40,000 portion, reducing the premium from around $14,000 to around $3,000. The buyer keeps more cash in hand while still entering the market with a 15% deposit.

Should You Capitalise the LMI Premium or Pay It Upfront

Most borrowers add the LMI premium to the loan balance at settlement rather than paying it upfront. Capitalising the premium increases your loan amount and the interest you pay over the life of the loan, but it preserves your cash for other settlement costs or for maintaining a buffer after you move in. Paying it upfront reduces your loan balance and your total interest cost, but it requires you to have that cash available at settlement.

If you're using the First Home Super Saver Scheme to boost your deposit, you might prefer to capitalise the LMI premium and keep the released super funds for your deposit and settlement costs. If you've saved well beyond your deposit requirement and have surplus funds, paying the premium upfront can save you money over the long term. Both options are viable, and the right choice depends on your cash position and your priorities at settlement.

Call one of our team or book an appointment at a time that works for you. We'll look at your deposit, your income, and the property you're buying, and work out which structure keeps more money in your pocket.

Frequently Asked Questions