Lenders Mortgage Insurance (LMI) & Guarantor Loans

But saving 20% for a property in Sydney, Melbourne, or Brisbane can take a decade. If you want to buy with a smaller deposit (e.g., 5% or 10%), the bank will charge you Lenders Mortgage Insurance (LMI).

The Great LMI Misconception

The most important thing to understand about LMI is that it does not protect you.

Even though you are the one paying the insurance premium (which can easily be $10,000 to $30,000+), the insurance policy protects the bank. If you default on your loan and the bank loses money selling your house, the LMI provider pays the bank the difference. You still lose your house, and the insurance company may even chase you for the shortfall.

How LMI is Calculated

LMI is calculated based on your Loan-to-Value Ratio (LVR).

• If you have a 20% deposit, your LVR is 80%. (No LMI required).
• If you have a 10% deposit, your LVR is 90%. (LMI required).

The higher your LVR, the higher the risk to the bank, and the exponentially more expensive your LMI premium will be. The good news is that you rarely have to pay LMI out of pocket upfront; the bank usually capitalizes it (adds it to your total loan amount), meaning you pay it off gradually over 30 years with interest.

Is LMI a Waste of Money?

Not necessarily. You have to weigh the cost of LMI against the cost of waiting. If it takes you four more years to save a full 20% deposit, the property market might rise by 15% during that time. Paying a $15,000 LMI fee today might actually be cheaper than paying $80,000 more for the same house four years from now. LMI is the "fee" you pay to buy time.

The Alternative: The Guarantor Loan

If you want to buy with a small deposit but refuse to pay LMI, you can use a Guarantor Loan.

This involves a close family member (usually parents) using the equity in their own home to secure the shortfall of your deposit.

• How it works: If you have a 5% deposit, your parents "guarantee" the remaining 15% using their house. The bank now sees a 20% security, so they waive the LMI entirely.
• The Catch: Your parents are taking on massive legal risk. If you default and the bank sells your house for a loss, the bank can legally force your parents to sell their house to cover the remaining 15% debt.
• The Exit Strategy: A guarantor does not have to stay on your loan for 30 years. Once you pay down your loan—or your property goes up in value—enough that your total equity reaches 20%, you can refinance and release your parents from the guarantee.

Interactive: LMI vs. Waiting Estimator

Is it better to pay LMI now or keep saving? Adjust the property price and your current deposit below to see the estimated LMI fee, compared to how much the property might rise in value while you wait.

General Advice Warning: The information provided here is for general educational purposes only. It does not take into account your personal financial objectives, situation, or needs. Before making any financial decisions, please consider the appropriateness of the information and consult with a licensed financial adviser.