Lenders Mortgage Insurance (LMI)

Definition

Lenders Mortgage Insurance (LMI) is a one-off insurance premium that protects the lender (not the borrower) if the borrower defaults on their home loan. LMI is typically required when the borrower's deposit is less than 20% of the property's value (i.e., the loan-to-value ratio exceeds 80%). The cost of LMI varies based on the loan amount and LVR and can range from a few thousand to tens of thousands of dollars.

Why It Matters for Property Investors

LMI allows investors to enter the property market sooner with a smaller deposit, but it adds to the overall cost of the investment. Some investors strategically pay LMI to purchase earlier and benefit from capital growth sooner, rather than waiting years to save a 20% deposit. However, paying LMI reduces your initial equity position and increases the total cost of the loan. The cost can sometimes be capitalised into the loan.