Do I pay LMI on a 5% deposit home loan?

If your initial deposit is lower than 20% of the purchase price of the property — in this case, 5% — you will likely be required to pay LMI.
Ava Crawford
Written by
Ava Crawford
Imogen Baxter
Reviewed by
Imogen Baxter
Last updated
December 4, 2023
0 minute read
Table of contents
Australian couple applying for low deposit home loan and paying lmi

The short answer to whether you pay lenders mortgage insurance on a home loan with 5% deposit is: generally speaking, yes. However, the reality is a lot more complex than that, and there are many ways to avoid the significant costs of LMI. Find out more about the ins and outs of LMI on a low-deposit home loan below.

When it comes to buying a new home, there are so many things to keep in mind that lender’s mortgage insurance may slip your mind completely. If you’re new to the Australian property market or are a first-home buyer, it might even be a concept you’re unfamiliar with.

In fact, when it comes to buying a house, the property price is only the first cost to consider. Some of the upfront costs that follow are decided by the size of your house deposit, and how much money you borrow.

The recommended deposit on a home loan in Australia is 20% of the value of the property.

If your initial deposit is lower than 20% of the purchase price of the property — in this case, 5% — you will be required to pay LMI.

What is LMI? What is LVR?

LMI stands for lenders mortgage insurance, and you’ll see both terms used. It is a fee that is paid to provide insurance for your lender if you are paying a low deposit on your home loan, below the recommended 20% of the property value. This is why you will often hear LMI talked about in the same breath as LVR.

LVR stands for the loan-to-value ratio of your home loan. This means the loan amount as compared to the total home loan value and is often expressed as a percentage. If you have paid a 5% deposit, your LVR might be noted as 95%. If loan-to-value ratio is done in tiers, yours would be LVR 95 or similar.

What this means is that with an LVR >80, you will pay lenders mortgage insurance. There are, of course, ways to minimise the cost of LMI while paying a smaller deposit on your home loan.

The cost of LMI

LMI can be a significant cost, as it is charged in relation to the property value. The more expensive your property is, the more you’ll be paying. Though you can shop around with different providers, there doesn’t tend to be a huge deal of different in LMI premiums. You will also need to factor in other expenses like stamp duty and conveyancing.

As an example, if you were to buy a $600,000 home with a 5% deposit, you would be borrowing $570,000 (plus the interest that accumulates over the life of the loan). LMI would then need to be paid and, depending on your lender and your circumstances, would work out to somewhere around $25,000.

When you’re already making a major financial investment, that’s a big price to factor in. So it’s important to know the eligibility criteria for not paying LMI, and the alternatives to paying LMI (while keeping your loan amount lower).

Can I capitalise my LMI with a 5% deposit?

The most common way to pay LMI is to capitalise it, meaning the fee is just added to your loan amount. While this means you don’t need to pay a large lump sum upfront, you will have to pay interest on the LMI.

Generally speaking, most lenders have a maximum LVR they will accept, inclusive of capitalised LMI. So, if you’re looking for a 95% LVR loan with a 5% deposit, adding LMI to that loan amount will then take you over the maximum LVR. So, when dealing with very low-deposit home loans, lenders will often require the upfront payment instead.

Avoiding LMI with low-deposit home loans

Since low deposit home loans mean your lender is taking on extra risk as opposed to borrowers with 20% deposits or people looking to refinance who already have some equity, avoiding LMI is all about demonstrating your reliability as a borrower.

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This is why your occupation might mean you could be exempt from paying LMI. If you work as a doctor, you may be able to borrow the full value of the property without paying LMI. In some circumstances, this may also apply to lawyers, solicitors, engineers, surveyors, geophysicists, accountants, auditors, actuaries and more. If you work in legal, mining, or finance professions, it may be worth enquiring about the eligibility criteria.

It is also why you do not have to pay LMI if you opt for a guarantor home loan.

With a guarantor home loan, a family member or close loved one is using the equity on their home as collateral on your loan. This minimises the risk for the lender, which is why you are able to borrow more money with a guarantor. As a disclaimer, this is also a significant risk for a family member/loved one to undertake, and can put stress on the relationship if you are unable to keep up with your home loan repayments.

If you receive a gifted deposit, you also won’t have to pay LMI. This is because it is a case where you have a smaller deposit and a loved one or family member gifts you the remaining deposit, so you will no longer be paying a 5% deposit. The lending criteria for a gifted deposit can be quite strict, so you will need to demonstrate proof of your ability as a saver by showing evidence of genuine savings.

The majority of people paying a low deposit will be first-home buyers, finding saving up for an upfront deposit challenging. In these cases (and some others!) there are federal government schemes available to help make this more accessible, and that may help you save on LMI.

Eligible first-home buyers may be able to use the first homeowners grant to top up their deposit, allowing them to make up the 20% required deposit. There are some restrictions on who can use this grant to keep in mind — it is only for owner-occupiers, and price caps may apply to the property values.

First-time buyers may also qualify for one of the federal government’s home guarantee schemes. There are several government schemes in effect, including one for regional home buyers and one for single parents (called the family home guarantee), but the largest is the first home guarantee (also called the first home loan deposit scheme or FHLDS).

This consists of a set number of homes allotted to Australian citizens who are first-home buyers with low-deposit home loans. These cannot be used on investment property purchases and are for owner-occupier purposes only.


How much is LMI in Australia?

Lender’s mortgage insurance may vary depending on a few factors. These can include:

  • LVR: The higher your loan-to-value ratio, the more LMI you may be set to pay. This is because higher loan amounts tend to be riskier for home loan lenders.
  • Loan amount: The more money you borrow, the more you may pay in LMI. Bigger loans tend to have longer loan terms and higher monthly repayments, so lenders may require higher levels of LMI.
  • Investor or owner-occupier: Some lenders may see owner-occupiers as low risk and therefore charge a higher premium to those purchasing investment property.
  • Employment status: If you are not employed full time, you may face higher LMI premiums and be viewed as higher risk.
  • Profession: Certain professions may be able to get a low deposit home loan without paying LMI. These tend to be medical professions (like doctors and nurses), or those in legal, finance, engineering and accounting professions.
  • Provider: There are multiple LMI providers on the market, and their premiums will vary. It might be worth shopping around to find an option that works for you.

Some lenders will also apply discounts to LMI for first home buyers, for example.

What is lender’s mortgage insurance (LMI)?

LMI is shorthand for lender’s mortgage insurance, and it is a fee paid as insurance to your home loan lender. It is paid when your house deposit is below the recommended 20% in order to minimise risk.

Do first-home buyers in Australia need to pay LMI?

Lenders mortgage insurance, or LMI, is payable when your deposit is less than 20%, whether you are a first time home buyer or a seasoned investor.

If you are a first time home buyer with a full 20% deposit, you will not need to pay LMI. Conversely, if you are going with a lower deposit home loan option, you may need to budget for LMI (which can be a significant cost).

Are Australian interest rates higher with a 5% deposit?

Interest rates will be different from home loan to home loan, but in general, they tend to be higher with the more risk your borrowing presents to lenders.

A 5% deposit presents a fairly high level of risk, as it tends to go hand in hand with a high loan amount. This means that you may see higher interest rates, thorough checking of credit scores, and stricter lending criteria for these loans.

If you see a low-deposit home loan boasting an eye-catching low-interest rate, it may be worth checking the comparison rate for a more accurate prediction of the interest you will pay over the duration of the loan. This accounts for any introductory offers or interest-only periods. This will also be impacted by your choice between a variable rate and a fixed rate.

As a first-home buyer, can I get a home loan with a 5% deposit?

As a first home buyer, a small deposit can make the property market seem a bit more approachable.

If you are concerned about needing extra help, there is extra assistance available for eligible first-home buyers.

  • First Home Owner Grant (FHOG): This is a grant of between $10,000 — $20,000 from the Australian government to help first-time home buyers with their property purchase price (conditions vary from state to state and price caps do apply, and properties must be owner-occupied - no investment property).
  • First Home Super Saver Scheme: This scheme allows you to make voluntary contributions to your superannuation and nominate to withdraw it for a first-time home purchase. This is a federal government scheme and the maximum amount deductible is $50,000.
  • First Home Guarantee (FHG): Also called the First Home Loan Deposit Scheme (FHLDS). Eligible first-home buyers may apply for a limited number of guaranteed homes (35,000 in the 2022-2023 financial year). The home guarantee scheme allows first-time buyers to purchase a residential property with a minimum 5% deposit, while the government guarantee the remainder of the deposit up to 20%. This saves you from paying lenders mortgage insurance.

Eligibility for these schemes will vary. It will generally require you to be an Australian citizen or permanent resident and to complete a check of your credit score.

How can I bring down the cost of LMI?

If you are committed to using a low-deposit home loan and paying LMI, there are always options to bring costs down.

While LMI might be similar from provider to provider, it is still worth comparing options on the market. Some insurers may offer discounts on LMI premiums to home loans with certain providers. If you are curious about this, it may be worth consulting a mortgage broker.

You may also choose to opt for a home loan with a cashback offer attached. While this will be a one-off payment, it is often several thousand dollars and can be used to assist in your payment of LMI. Just make sure the home loan appeals to you outside of the cashback, as you’ll be making repayments on it for the full loan term.

What is the difference between LMI and stamp duty?

While LMI is lender’s mortgage insurance, paid to protect your lender, stamp duty is a tax charged by state and territory governments for the transfer of ownership on property and other high value possessions.

While LMI is only needed for home loans with deposits beneath 20%, all transfer of property requires stamp duty apart from very specific circumstances — like inheritance.

However, there are some circumstances where like LMI, stamp duty is waived.

Most notably, many states will waive stamp duty for first time home buyers, but the rules vary from state to state. In NSW, stamp duty is waived for eligible first home buyers on existing or new homes with a $650,000 price cap, and discounted for homes between $650,000 - $800,000 (vacant land is also eligible, with price caps applying). In Tasmania, first home buyers purchasing property valued at $500,000 or less can receive a 50% reduction on stamp duty.

If you are a first home buyer, and particularly if you are applying for a first home owners grant, make sure to look up your state or territory’s requirements and eligibility criteria for stamp duty exemptions.

Do I need to pay LMI if I am refinancing?

Generally speaking, when you refinance the equity you have in your home should be large enough that you do not need to pay LMI. This will be because you have already paid your upfront home deposit on your original home loan, and you are simply moving to a home loan with better features or a lower interest rate. Your LVR should be lower as you will have already been making repayments on your loan.

However, if you initially bought a property with a 5% deposit and are looking to refinance shortly afterwards, you may not yet have the equivalent of a 20% deposit. Refinancing can be costly (you may need to pay a range of early exit and discharge fees, as well as application and conveyancing fees on a new home loan), and the initial costs of buying a house are large. Refinancing too soon, no matter how attractive those headline rates might look, could leave you in a much worse position.

Make sure you are completely happy with your home loan before you lock it in, to save yourself the heartache. Remember that fixed rate loans can be costly to exit, while variable rate loans can be volatile. Always check the comparison rate for a more accurate view of the interest you will be paying. Low rate home loans are often harder to find for higher LVR tiers, or have stricter eligibility criteria.

It may be worth checking this again later, after you definitely have more than 20% equity in your property and can refinance without paying LMI.

This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.

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