If you’re a first-time or second-time home buyer in Melbourne, you’ve likely come across the term Lenders Mortgage Insurance, or LMI. It’s one of those concepts that can seem a bit mysterious at first glance, especially when you’re already juggling terms like offset accounts, stamp duty, and interest repayments pay. But understanding how LMI is calculated can save you thousands—and even help you get into the property market sooner.
As a licensed mortgage broker at AxJ Finance Broker, I’ve guided plenty of home buyers through the fine print of LMI and how it affects their loan amount, repayments, and home loan balance. This article breaks down the process of how to calculate LMI.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is an insurance policy that protects the lender, not the borrower, if you default on your home loan. It’s usually required when your deposit is less than 20% of the property value—in other words, when your loan-to-value ratio (LVR) is above 80%.
While it may seem unfair to pay for an insurance policy that benefits the bank, LMI is what allows many buyers to own property sooner, rather than waiting years to save a bigger deposit. That’s particularly helpful in cities like Melbourne, where property prices tend to rise faster than most people can save.
LMI vs Mortgage Protection Insurance
Another common point of confusion is the difference between Lenders Mortgage Insurance and Mortgage Protection Insurance. They sound similar but serve completely different purposes:
LMI protects the lender in case you default on your loan.
Mortgage Protection Insurance protects you in case of serious illness, injury, or job loss that affects your ability to repay your loan.
Make sure you understand what your premium is covering before signing anything.
Who Can Qualify for an LMI Waiver?
Many banks in Australia offer LMI waivers for certain professions they consider “low risk,” and nursing is often on that list. These waivers mean you can borrow up to 90%, sometimes even 95%, of a property’s value without paying thousands in LMI.
Professions that commonly qualify for an LMI waiver include:
- Registered nurses and midwives
- Doctors and GPs
- Dentists
- Pharmacists
- Physiotherapists
- Accountants and lawyers (in some cases)
But even if you don’t qualify for a waiver or are buying with a smaller deposit, that doesn’t mean you’re left in the dark. Understanding how LMI is calculated can help you plan ahead and make smarter decisions.
Whether you’re early in your career or exploring a move into your second home, knowing how LMI works puts you in a stronger position to negotiate the right nurse home loan.
How is LMI Calculated?
This question has no single answer because LMI is based on several variables. However, most lenders use similar criteria to calculate the LMI cost, which is usually added to your home loan account or paid upfront.
Here’s what typically affects your LMI premium:
- Loan amount: This refers to the total sum of money you borrow from a lender to purchase a property. It directly influences the LMI premium, as a higher loan amount generally increases the insurance cost.
- Property value: The market value of the property you wish to purchase. It is used to calculate the loan-to-value ratio (LVR), which in turn affects the LMI premium.
- Deposit amount (or LVR): The deposit amount is the initial payment made towards purchasing a property, while the loan-to-value ratio (LVR) is the percentage of the property’s value that is financed through the loan. A higher LVR typically results in a higher LMI premium.
- Loan term: The duration over which the loan is to be repaid. A longer loan term can impact the LMI premium, as it may increase the lender’s risk exposure.
- Type of borrower (e.g. permanent resident, non-Australian resident borrowers): The borrower’s residency status can affect the LMI premium. For instance, non-Australian resident borrowers may face higher premiums due to perceived higher risk.
- Loan purpose (e.g. owner-occupied vs investment): The intended use of the property—whether it is for personal residence (owner-occupied) or for generating rental income (investment)—can influence the LMI premium. Investment properties often attract higher premiums due to the increased risk associated with rental income fluctuations.
Let’s say you’re purchasing a home in Melbourne for $700,000 and have saved a $50,000 deposit (around 7%). Your LVR would be approximately 93%, and the LMI could cost you anywhere from $20,000 to $25,000, depending on your lender’s risk profile and whether you opt to pay LMI upfront or capitalise it into your loan.
How Can You Avoid Paying LMI?
There are a few ways to avoid paying LMI altogether:
1. Save a 20% Deposit
Saving a 20% deposit is the simplest way to avoid paying lenders mortgage insurance (LMI). By having a deposit that equals or is more than 20% of the purchase price, you lower your loan-to-value ratio (LVR) below 80%. This means most lenders won’t require you to pay LMI. While it might take longer to save this amount, it can save you a lot of money in insurance costs and interest repayments over the life of your home loan.
2. Qualify for the Home Guarantee Scheme
The Australian Government helps eligible home buyers with programs like the First Home Guarantee, Family Home Guarantee, and Regional First Home Buyer Guarantee. These programs let you buy a home with just a 5% deposit without paying LMI. To qualify, you need to meet certain criteria, like being a permanent resident or citizen, earning below a certain income level, and being a first home buyer or a single legal guardian with a dependent child, depending on the scheme. These schemes can make it easier to get into the property market sooner.
3. Use a Guarantor Loan
With a guarantor loan, a family member can use the equity in their own home to help secure your loan. This reduces your LVR below 80%, so you don’t need to pay LMI. However, this option comes with risks for both you and the guarantor, as the guarantor is responsible if you can’t make your loan repayments. It’s important to get professional advice to understand the risks and make sure this option fits your financial situation and goals.
Paying Lenders Mortgage Insurance: Upfront or Capitalised?
Once you’ve received your loan offer, you’ll have the choice to either:
- Pay LMI upfront as part of your settlement costs, or
- Add it to your loan balance, increasing your monthly repayments
Adding it to your loan amount might seem easier short-term, but it increases your interest repayments over time. For instance, a $20,000 LMI premium added to a 30-year mortgage at a variable rate could cost you thousands more in total market interest rates.
At AxJ Finance Broker, we help you compare scenarios—fixed rate home loans vs variable rate home loans, paying upfront vs capitalising—to ensure your decision aligns with your financial situation and future goals.
Final Thoughts: LMI Isn’t the Enemy
LMI often gets a bad rap—but it’s not the villain in your home loan journey. In many cases, it’s a powerful enabler that helps you secure your own home sooner. The key is understanding how it’s calculated, how much it could cost you, and whether it’s worth paying based on your unique situation.At AxJ Finance Broker, we walk you through every cost, condition, and scenario—so you’re never in the dark about what your LMI premium means. Whether you’re planning to buy a family home or an investment property in Melbourne, we’ll help you make a confident, informed decision that aligns with your goals.