Unlock the secrets to Lenders Mortgage Insurance

What Is Lenders Mortgage Insurance and Who Actually Pays It

Lenders Mortgage Insurance is a one-off fee charged when you borrow more than 80% of a property's value. It protects the lender if you default on the loan, but you're the one who pays for it. The cost varies based on how much you borrow and your deposit size, and it can range from a few thousand dollars to tens of thousands depending on your loan amount.

The premium is usually added to your loan rather than paid upfront, so you don't need the cash on settlement day. That means you're paying interest on the premium over the life of your loan, which increases the true cost. For someone borrowing with a 5% deposit, the premium might sit somewhere between $10,000 and $30,000 depending on the property value and lender.

How the Premium Is Calculated

The premium depends on your loan to value ratio. A borrower with a 95% LVR pays more than someone with a 90% LVR, even if they're buying the same property. Each lender uses a different insurer and a different rate card, so the same loan scenario can produce very different premiums depending on where you apply.

Consider a buyer purchasing at the current median in a Perth suburb who has saved a 10% deposit. One lender might charge $12,000 in insurance, while another charges $15,000 for the identical loan. That difference alone can influence which lender makes sense, particularly if the lower premium comes with a similar interest rate. We regularly see this variation when comparing home loan options across multiple lenders.

When It Makes Sense to Pay It

Paying the premium isn't always a mistake. If property values are rising and waiting another year to save a 20% deposit means you're priced out of the market, the cost of the insurance might be lower than the cost of waiting. In growth areas around Perth, that calculation changes quickly.

In our experience, buyers who are renting and watching their target suburb increase in value often come out ahead by entering the market sooner, even with the insurance cost factored in. The alternative is continuing to pay rent while saving, with no guarantee that prices will hold. That's a trade-off worth running the numbers on before making a call either way.

The Difference Between Paying Upfront and Capitalising

You can pay the premium in cash at settlement or add it to your loan. Most borrowers capitalise it because they've already stretched their savings to cover the deposit and other upfront costs like conveyancing and building inspections. If you do capitalise, you'll pay interest on that amount for as long as the loan runs.

Over a 30-year loan, capitalising a $15,000 premium could mean paying several thousand dollars more in interest compared to paying it upfront. But if paying it upfront leaves you with no buffer after settlement, capitalising is usually the safer choice. Financial stability in the first few months of ownership matters more than shaving a bit of interest off decades down the track.

How It Affects Your Borrowing Capacity

The premium itself doesn't reduce how much you can borrow, but it does increase the total amount you're asking the lender to provide. If you're already at the edge of what a lender will approve, adding the premium to the loan can sometimes push the total above what they're willing to lend.

As an example, a buyer approved for a $500,000 loan with a $15,000 premium capitalised is actually borrowing $515,000. If the lender's maximum was $510,000, that loan won't proceed unless the buyer pays the premium upfront or increases their deposit. This comes up more often than you'd think, particularly when borrowers are using every dollar of their borrowing capacity.

Avoiding It Without Waiting Years

Some buyers use a family guarantee to avoid paying the insurance without needing a 20% deposit. A parent or close family member offers their property as additional security, which reduces the lender's risk and removes the need for insurance. The guarantee can be removed once you've built enough equity, usually within a few years.

Another option is accessing schemes that waive the insurance for certain buyers. First home buyers in particular may have access to programs that reduce or eliminate the premium, depending on income and property price. If you're eligible, this can save a significant amount without requiring you to delay your purchase. You can read more about what's available for first home buyers depending on your situation.

When Refinancing Doesn't Remove It

Once you've paid the premium, it's gone. If you refinance to another lender while still above 80% LVR, you'll be charged again. That's one reason why refinancing in the first few years after purchase can be expensive unless you've built enough equity to cross the 80% threshold.

If you started with a 90% LVR and your property value hasn't increased much, refinancing before you reach 80% LVR means copping another premium. Waiting until you've either paid down the loan or seen some capital growth usually makes more sense, unless the rate saving is large enough to justify the second charge.

If you're weighing up whether it's worth moving to another lender, call one of our team or book an appointment at a time that works for you. We'll run the numbers and show you what it actually costs versus what you'd save, so you can make the call with confidence.

Frequently Asked Questions