LMI Explained: How to Buy a Home with Under 20% Deposit

Saving a 20% deposit can take years, and lenders mortgage insurance is the usual price of buying before you get there. It is also one of the most misunderstood costs in Australian home buying: you pay for it, but it does not protect you. This guide explains what LMI is, when it applies, how it is paid, and the government schemes that let eligible buyers purchase with a small deposit and no LMI at all, using the current rules published by Housing Australia.

What is lenders mortgage insurance?

Lenders mortgage insurance (LMI) is insurance a lender takes out to cover itself if a borrower defaults and the property sells for less than the amount owed. The Insurance Council of Australia's guide to LMI is blunt about who benefits: LMI covers the lender, not you or any guarantor, even though the lender usually passes the cost on to you. Only the lender can claim on it.

It is also different from mortgage protection insurance, which some borrowers buy separately to cover their own repayments if they cannot work. LMI does nothing to help you make repayments.

When do you have to pay LMI?

LMI is tied to your loan-to-value ratio (LVR): the loan amount as a percentage of the property's value. ASIC's Moneysmart explains in its guide to saving for a house deposit (updated August 2026) that if your LVR is above 80%, you may need to pay LMI. Borrowing $450,000 to buy a $600,000 home is an LVR of 75%, so no LMI. Borrowing $540,000 on the same home, with a 10% deposit, is an LVR of 90%.

Note that the lender uses its own valuation of the property, which may differ from the price you agree to pay. Buying costs such as stamp duty and legal fees also come out of your savings, so the deposit left for the LVR calculation can be smaller than you expect.

How much does LMI cost and how is it paid?

There is no single price. The Insurance Council says the premium depends on the lender, how much it lends to you and the size of your deposit, so the same buyer can get different quotes from different lenders. Ask each lender for an LMI figure in writing before you compare loans.

The premium is a one-off cost paid at settlement that covers the lender for the life of the loan. You can usually either pay it upfront or add it to the loan. Adding it, often called capitalising LMI, means paying interest on the premium for as long as the loan runs, and it pushes your LVR higher. APRA's prudential guide APG 223 notes that LVRs above 90%, including any capitalised LMI premium, clearly expose lenders to a higher risk of loss, which is why some lenders set tighter rules at that level.

What happens with LMI if you cannot repay?

If the property is sold for less than you owe, you still owe the shortfall. The Insurance Council explains that the insurer pays the lender, then may ask you to repay the shortfall to the insurer instead. LMI insurers have hardship policies, and anyone in that position should contact the insurer early. This is why it pays to think about an emergency buffer before buying; how much should be in an emergency fund covers how big that buffer could be.

How can you buy with less than 20% and avoid LMI?

For eligible buyers, the main alternative is the Australian Government 5% Deposit Scheme, formerly the Home Guarantee Scheme, administered by Housing Australia. Instead of LMI, Housing Australia gives the lender a guarantee covering up to 15% of the property value, so you can buy with a smaller deposit. From 1 October 2025 the scheme has no income caps and no waitlists, according to the official 5% Deposit Scheme page.

Help to Buy works differently from the guarantee schemes: the government owns a share of the home and shares in any gain or loss when you sell or buy back its share, according to the Help to Buy scheme page. Family guarantees are offered by individual lenders, not the government; APRA expects lenders to assess the guarantor's income and creditworthiness, and Moneysmart reminds buyers that if you cannot pay, the guarantor has to.

What are the 5% Deposit Scheme price caps?

Both the purchase price and the lender's valuation must be at or below the cap for the location. These are the caps published on the scheme's property price caps page as at October 2026:

Regional centres with the higher cap include the Central Coast, Illawarra and Newcastle and Lake Macquarie in NSW, Geelong in Victoria, and the Gold Coast and Sunshine Coast in Queensland. Use the postcode search tool on the same page and confirm the cap with your lender.

How do you apply for the 5% Deposit Scheme?

1. Check eligibility. Use the online eligibility tool and read the scheme's Information Guide (1 July 2026).
2. Contact a Participating Lender. You cannot apply directly to Housing Australia; the lender assesses you and submits the application with your home loan.
3. Get pre-approved and search. Once pre-approved you have 90 days to find a home and sign a contract, within the price cap.
4. Settle and move in. For an existing home, you must move in within 6 months of settlement. Separate timelines apply to building a new home.
5. Keep meeting the conditions. Live in the home as an owner-occupier and do not rent it out while the guarantee applies.

Two rules catch people out. You are expected to use as much of your savings as possible for the deposit, and if you have 20% or more left after buying costs, the loan is not eligible. And the guarantee can end, for example if you rent the home out, borrow more against it, or refinance with a lender outside the panel; if your LVR is still above 80% at that point, the lender may require LMI. Refinancing myths covers that trap in more detail.

When can paying LMI still make sense?

If you do not qualify for a scheme, paying LMI can still be a reasonable trade: a known, one-off cost in exchange for buying sooner rather than saving for several more years while paying rent. Whether it is worth it depends on the premium you are quoted, how long it would take to reach 20%, and whether the repayments leave you room to breathe. Moneysmart suggests checking what your repayments would be if rates rose by 2%.

Lenders will still assess whether you can afford the loan, whatever the deposit. How banks assess your income and how to increase your borrowing power explain that side. If you would rather talk options through with a broker, NewGen Finance Brokers' first home buyer page outlines how it helps buyers compare lenders (NewGen is TodayForge's sister business; an enquiry is free and doesn't commit you to a loan).

What mistakes do buyers make with LMI?

• Assuming LMI protects them if they lose their job. It protects the lender.
• Comparing interest rates but not the LMI quote, which can differ between lenders.
• Capitalising LMI without noticing it adds interest and raises the LVR.
• Not checking scheme eligibility before paying LMI, especially since the 5% Deposit Scheme dropped its income caps.
• Forgetting that refinancing later with less than 20% equity may mean paying LMI again.