Everything You Need to Know About Lenders Mortgage Insurance

What Lenders Mortgage Insurance Actually Covers

Lenders Mortgage Insurance protects the lender if you default on your loan and the sale of your property doesn't cover what you owe. It doesn't protect you. The premium is calculated based on your loan amount and how much you're borrowing above 80% of the property value. Under APRA's Prudential Standard APS 112, lenders are required to hold LMI on residential loans where the loan to value ratio exceeds 80%, though the policy itself is paid for by you as the borrower.

Consider a self-employed buyer in Adelaide purchasing at the current median. With a 10% deposit, you'll trigger LMI because you're borrowing 90% of the property value. The insurer assesses the claim limit based on the higher of your original loan amount and what you still owe at the point of default, with coverage extending to at least 40% of that figure. The premium you pay upfront goes to the insurer, not the lender, and it's a one-off cost tied to that specific loan. If you refinance or switch lenders before you reach 80% equity, you'll pay LMI again on the new loan unless you've built enough equity to avoid it.

For self-employed borrowers who've recently restructured or are in their first full year of trading, LMI can be the difference between waiting another 18 months to buy or entering the market now. Your borrowing capacity is already being assessed on different income documentation compared to wage earners, and the deposit hurdle compounds that. LMI removes the need to save the full 20%, but it comes at a cost that varies significantly between lenders and LMI providers.

How the Premium is Calculated

The LMI premium is calculated on a sliding scale. Two factors drive the cost: how much you're borrowing as a percentage of the property value, and the dollar amount of the loan itself. A 95% LVR loan attracts a higher premium rate than a 90% LVR loan, and a loan of $600,000 at 90% LVR will have a higher dollar premium than a loan of $400,000 at the same LVR.

Lenders use different LMI providers, and those providers apply different premium scales. Some lenders also negotiate volume discounts with their insurer, which they may or may not pass through to you. For the same loan amount and LVR, you can see premium differences of several thousand dollars depending on which lender you go with. This is one reason why comparing loan options on rate alone doesn't give you the full cost picture when you're borrowing above 80%.

The premium is capitalised into your loan in most cases, meaning you don't pay it upfront in cash. You're borrowing the premium amount and paying interest on it over the life of your loan. Some states also charge stamp duty on the LMI premium itself, which adds another layer of cost depending on where you're buying. In our experience working with self-employed clients across the country, the LMI component often catches buyers off guard during pre-approval because it wasn't factored into their settlement cost estimate.

When You Can Avoid LMI Without a 20% Deposit

The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a 5% deposit without paying LMI. Housing Australia provides a guarantee to the participating lender of up to 15% of the property value, bringing your combined deposit and guarantee to 20%. No income caps apply, and the scheme is available through a panel that includes both major banks and non-major lenders. Property price caps vary by location. In South Australia, the cap is $900,000 in Adelaide and regional centres, and $500,000 in other areas.

Applications are made through a participating lender, not directly through Housing Australia. You can use a fixed rate, variable rate or split loan structure depending on what the lender offers. The scheme can't be combined with Help to Buy, but it can generally be used alongside state and territory grants and stamp duty concessions. Both the purchase price and the lender's assessed value of the home must be at or below the applicable cap for your location.

For self-employed buyers, the scheme doesn't change how your income is assessed, but it does remove the LMI cost if you meet the eligibility criteria. If you're outside the first home buyer definition or your purchase price exceeds the cap, you're back to either saving a 20% deposit or paying LMI. Some professions also have access to LMI waivers at higher LVRs through specific lender programs, though those tend to be restricted to medical, legal and accounting professionals with particular employment structures.

Why Self-Employed Buyers Pay More Attention to LVR Bands

Self-employed borrowers are already working within tighter serviceability margins because lenders assess your income differently. Most lenders average two years of tax returns, and some apply further discounts depending on your industry or business structure. If your most recent year shows lower income than the prior year, that affects your borrowing capacity immediately. Adding LMI into the equation means you're now carrying a higher loan amount on income that's being assessed conservatively.

When you're borrowing at 90% LVR as a self-employed buyer, two things happen. Your serviceability buffer is applied to a larger loan amount, and the LMI premium is capitalised on top of that. If you're at the edge of what you can borrow, the premium itself can push you over the serviceability limit, forcing you to either increase your deposit or reduce your purchase price. We regularly see this with buyers who have pre-approval at a certain loan amount and then realise the LMI premium wasn't included in the original scenario.

The alternative is to aim for an 85% or 80% LVR from the outset. At 85%, your LMI premium drops compared to 90%, and your loan amount is lower, which improves your serviceability position. At 80%, you avoid LMI entirely. For a self-employed buyer with variable income, getting to 80% LVR also means you're not paying interest on an LMI premium for the next 25 years, which can be a significant saving over the life of the loan. If you're weighing up whether to wait and save more or buy now with LMI, the decision often comes down to how your income is trending and what you expect your business performance to look like over the next 12 to 24 months. If you're in a position where understanding your borrowing capacity would help clarify your options, that's a useful next step.

What Happens to LMI When You Refinance

LMI is tied to the original loan, not to you or the property. If you refinance to a new lender before you've reached 80% equity, you'll pay LMI again on the new loan unless your equity position has improved enough to avoid it. The premium you paid on the first loan doesn't transfer and isn't refunded. Some lenders offer portability, which allows you to take your existing loan to a new property without re-triggering LMI, but that only works if you're staying with the same lender and meeting their portability criteria.

For self-employed buyers, this becomes relevant when your financial position improves and you want to access lower rates or different loan features by switching lenders. If you refinance 18 months after purchase and you're still sitting at 85% LVR because property values haven't moved much, you'll pay LMI again. That cost needs to be weighed against the rate saving or feature benefit you're chasing. In some cases, it makes sense to wait until you've either paid down the loan or seen enough capital growth to cross the 80% threshold before refinancing. In other cases, the rate differential is large enough that even with a second LMI premium, you're still ahead over a three to five year period.

If you've built equity through loan repayments or property value increases and you're now below 80% LVR, refinancing to a new lender won't trigger LMI. You'll go through a standard application process, and the new lender will value the property as part of their assessment. If that valuation supports an LVR of 80% or below based on your new loan amount, you're clear. This is one reason why holding a property through the first few years of ownership, particularly in a market where values are rising, can open up refinancing options that weren't available at purchase. Understanding when and how to refinance your home loan depends on your equity position and what you're trying to achieve with the switch.

LMI and Investment Property Purchases

LMI applies to investment property loans the same way it applies to owner-occupied loans, but the premium is typically higher at the same LVR. Lenders treat investment loans as higher risk under the APRA framework, and that risk weighting flows through to the LMI pricing. If you're borrowing 90% to purchase an investment property, expect to pay more in LMI than you would on an owner-occupied purchase at the same LVR and loan amount.

For self-employed buyers using an investment property to build wealth or generate rental income, the LMI premium is not tax deductible as a standalone cost. If you capitalise the premium into your loan, the interest you pay on that portion of the loan is deductible in the same way as the rest of your investment loan interest, but the premium itself doesn't give you a separate deduction. This is different to other costs like loan establishment fees or valuation fees, which can often be claimed in the year they're incurred.

From a strategy perspective, paying LMI on an investment property makes sense when the rental yield and expected capital growth justify entering the market sooner rather than waiting to save a 20% deposit. If you're self-employed and your income is trending upward, locking in a purchase now with LMI might be preferable to waiting two years while prices move further ahead. The trade-off is the premium cost and the higher loan amount, both of which affect your cash flow and serviceability for future borrowing. If investment property is part of your plan, reviewing your overall loan structure through investment loans can help you understand how LMI fits into your broader strategy.

How LMI Affects Your Settlement Costs

LMI is typically capitalised into your loan, meaning it's added to the amount you borrow rather than paid in cash at settlement. The practical effect is that your loan amount increases by the premium amount, and you pay interest on that additional borrowing over the life of the loan. Some lenders also allow you to pay the LMI premium upfront in cash if you prefer not to capitalise it, though most buyers choose to capitalise because it preserves their available cash for other settlement costs or post-purchase expenses.

In some states, stamp duty is payable on the LMI premium itself. This adds a further impost that is paid at settlement and cannot be capitalised. The duty rate varies by state, and not all states charge it, so your total LMI-related cost depends on where you're buying. When you're self-employed and managing cash flow carefully, understanding the full settlement cost including LMI premium, any applicable duty on that premium, and other disbursements is critical to avoiding a shortfall at settlement.

Your lender will usually provide an indicative LMI premium amount at the pre-approval stage, but the final premium is confirmed closer to settlement once the loan is formally assessed and the LVR is locked in based on the lender's valuation. If the valuation comes in below your purchase price, your LVR increases and so does your LMI premium. This is another reason why a conservative approach to purchase price relative to likely valuation is useful, particularly in markets where valuations are lagging sale prices. If you're preparing for your first purchase and want to understand the full cost breakdown, starting with first home buyer home loans can give you a clearer picture of what to expect.

Call one of our team or book an appointment at a time that works for you. We'll walk through your income documentation, your deposit position, and the lenders that make sense for your situation, including a clear breakdown of LMI costs and how they affect your borrowing capacity and settlement figures.

Frequently Asked Questions