Buying your first home in Sydney or Melbourne often starts with one important question: “How much deposit do I really need to buy a home?”
For many first-home buyers, the answer is shaped by the lenders mortgage insurance (LMI). LMI can be one of the highest upfront costs if your deposit is below 20%, but it is also one of the most misunderstood parts of the home loan process.
At Unconditional Finance, we help first-home buyers understand when LMI is likely to apply, how it affects your borrowing capacity and repayments, and what options may help you avoid or minimise it.
What Lenders Mortgage Insurance (LMI) Actually Is
Understanding the purpose of LMI for first home buyers and how lenders apply it can help you make clearer decisions about your deposit and borrowing structure.
Lenders mortgage insurance protects the lender if the loan cannot be repaid and the sale of the property does not cover the remaining balance. Although the borrower pays the premium, the insurance does not protect the borrower. Instead, it reduces the lender’s financial risk when assessing a high LVR home loan, usually above 80%.
Some lenders use an external mortgage insurer, while others use their own internal LMI model. External insurers have their own assessment rules, which sit on top of the lender’s criteria. Internal LMI models may offer slightly different tolerances, but also have their own verification steps and documentation requirements.
Because LMI is included in many first-home buyer home loan structures, we help you understand how it affects your borrowing position, interest rate options, loan features, and long-term flexibility before you commit to a loan structure.
Why LMI Exists and How It Fits Into the System
Knowing why LMI is built into the lending system can help you understand why it appears in many first-home buyer scenarios.
LMI exists to help lenders manage the higher risk of approving loans with small deposits. Without LMI, lenders would typically:
- restrict borrowing above 80% LVR,
- require significantly higher interest rates, or
- impose strict minimum savings periods.
For borrowers, LMI indirectly supports:
- access to low-deposit home loan options,
- earlier entry into the property market,
- more competitive loan structures even at higher LVRs,
- a broader choice of lenders willing to consider applications with modest savings.
This is why understanding LMI is a key step in planning your first home loan. It helps you decide whether paying LMI fits your goals, or whether alternative pathways suit your situation better.
When First-Home Buyers Typically Pay LMI
LMI for first home buyers usually becomes part of the conversation when your deposit or borrowing structure triggers a higher-risk category for lenders.
Buying With Less Than a 20% Deposit
Most lenders charge LMI when the deposit is below 20%. However, some lenders have internal risk rules that may still involve LMI even if you reach 20% on paper. This can happen if the bank valuation is lower, or if the property type requires a more conservative LVR.
Higher Final Purchase Price
In competitive markets, buyers often increase their offer. Even a small increase may push your LVR above 80% and trigger LMI. Valuations can also come in lower than the contract price, affecting your actual LVR even if your deposit size hasn’t changed.
Using Partially Borrowed Deposit Funds
If some of your deposit comes from a personal loan, credit card, or other borrowed source, lenders may classify this as higher risk. This may:
- trigger higher LMI,
- restrict lender options, or
- change how your application is assessed.
Postcode or Property-Type Restrictions
Some lenders impose tighter LVR caps on specific suburbs, high-density developments, new apartment towers, lifestyle properties or locations with slower resale markets. If a postcode is limited to 85% LVR, borrowing above that may automatically involve LMI.
How LMI Is Calculated and Added to Your Loan
Because LMI pricing varies between lenders, understanding the factors behind the premium can help you compare options more clearly.
One-Off Premium Structure
The LMI premium depends on:
- the loan size,
- the loan-to-value ratio (LVR),
- the property type,
- whether the loan is owner-occupied or investment,
- repayment type (principal and interest vs interest-only),
- whether the loan structure includes multiple properties or securities.
LMI premiums rise sharply at certain LVR brackets. A small move from 89% to 90% LVR can significantly increase the premium.
Capitalising LMI Into the Loan
Many lenders allow you to add the LMI premium to the loan amount instead of paying it upfront. Capitalising LMI increases your starting balance, which affects:
- your repayments,
- the interest you pay over time,
- how quickly you reduce your LVR,
- when you may be able to refinance without paying LMI again.
Some lenders allow capitalisation above 95% LVR, while others have strict caps, which affects lender choice.
How LMI Affects Your Repayments, Equity and Future Options
Once LMI is added to your loan, it influences several long-term factors that first-home buyers need to be aware of.
Repayments
A higher loan amount leads to higher minimum repayments. This can influence how lenders assess your borrowing capacity for future purchases or upgrades.
Equity Growth
Starting with a higher LVR means it can take longer to reach:
- 80% LVR for LMI-free refinancing,
- sufficient equity for renovations,
- enough equity to buy an investment property.
Equity grows through both repayments and market movement, so the timeline varies between borrowers.
Refinancing Pathways
If you refinance while your LVR is above 80%, new LMI may apply unless the lender offers special internal arrangements. Some lenders allow internal restructures or repricing without re-triggering LMI, but this varies widely.
Options That May Help You Avoid Paying LMI
There are several pathways that may help you avoid LMI entirely, depending on your eligibility and timeframe.
1. Adjusting the Purchase Strategy
Small changes to your price range, location, or property type may lower your borrowing amount enough to stay under 80% LVR. Sometimes shifting your budget by even a few thousand dollars changes the outcome.
2. Government Guarantee Schemes
Housing Australia administers several guarantee programs that allow eligible buyers to purchase with smaller deposits without paying LMI. These include property price caps, income limits, and specific eligibility rules. Applications under these schemes often have their own assessment process and lender participation list.
3. Shared Equity Programs
Shared equity reduces the loan amount from the outset because a government or shared-equity partner contributes part of the purchase price. These arrangements follow strict rules regarding ownership, future sale conditions, and buy-back processes.
4. Family Guarantee
A family guarantee home loan uses a portion of a family member’s home equity as additional security. This reduces the effective LVR and may eliminate LMI. Some lenders offer limited guarantees that cap the guarantor’s liability to a specific amount.
5. Profession-Based Waivers
Some lenders offer LMI waivers to borrowers in certain professions, often requiring minimum income levels or specific employment conditions. These policies vary between lenders and change regularly.
Ways to Reduce LMI If You Still Choose to Pay It
If avoiding LMI completely is not possible, there are strategies that may help reduce the cost.
Lowering the LVR Band
Even small deposit increases, such as tax refunds, bonuses, or additional savings, may move your application into a lower LMI tier.
Improving Deposit Structure
A strong, genuine savings pattern strengthens your application and may open up more competitive lenders and premium structures.
Planning for the Long Term
Some first-home buyers choose to pay LMI strategically to enter the market earlier, then refinance once their LVR drops below 80%. This decision depends on property goals, lifestyle needs, and market conditions.
LMI, Refinancing and Future Changes to Your Loan
LMI continues to influence your options even after settlement, especially when reviewing your loan later.
Refinancing with Lower LVR
Once your LVR falls below 80%, most lenders offer wider loan choices, lower interest rates, and greater flexibility. This stage often becomes a natural checkpoint for reviewing your loan structure.
Refinancing with Higher LVR
If you refinance your home loan above 80% LVR, the lender may require:
- a new valuation,
- updated income verification,
- a fresh LMI approval,
- additional credit checks.
We help assess whether refinancing is worthwhile based on your goals and expected cost savings.
Questions to Ask Before You Agree to Pay LMI
Asking the right questions before you proceed with LMI can help you understand the long-term implications.
Deposit and LVR Clarity
Ask when the lender will order the valuation, as this can influence whether your LVR changes during the approval process.
Cost Breakdown
Compare LMI premiums between lenders. Differences can be substantial even when interest rates are similar.
Government Scheme Alternatives
Ask about processing times, scheme availability, property caps and whether your chosen lender participates. Some schemes require faster document collection or specific contract conditions.
How We Typically Approach LMI for First-Home Buyers
As mortgage brokers in Sydney, our process focuses on clarity, long-term planning, and helping you compare pathways that suit your goals.
Scenario Mapping
We show your first 1–3 years of loan projections, including how fast your LVR may drop and when refinancing could become viable.
Comparing Pathways
We present options side-by-side, including:
- buying now with LMI,
- buying under a guarantee scheme,
- buying under shared equity,
- waiting longer to save,
- adjusting the purchase strategy.
Long-Term Guidance
We help you understand how your future plans, such as upgrading, investing or changing careers, may influence whether LMI is suitable for you today.
Making LMI Work for Your First Home Pathway
Understanding LMI for first home buyers gives you clearer insight into how your loan structure may affect your long-term plans. LMI can help you buy sooner, but alternative pathways can reduce or eliminate the cost depending on your situation. Once you see the differences in repayments, equity growth and future refinancing options, it becomes easier to choose the approach that aligns with your goals.
If you’re unsure whether to avoid LMI, minimise it, or use it strategically, we can walk you through the pathways that may help you avoid or reduce LMI, depending on your situation. If you’d like to explore your options, our mortgage brokers in Sydney and Melbourne can guide you through the next steps at your own pace.
Disclaimer: The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention are taken in its preparation, any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances. Terms, conditions, fees and charges may apply. Normal lending criteria apply. Rates are subject to change. Approved applicants only.
Frequently Asked Questions (FAQs)
LMI is an insurance policy that protects the lender if you cannot repay your home loan and the sale of the property does not cover the balance. It is usually charged when you borrow more than 80% of the property’s value.
No. LMI protects the lender, not you as the borrower. If you want cover for illness, injury, job loss or death, you would need to look at products such as income protection, life insurance or other personal cover, which are completely separate from LMI.
Most lenders allow you to add the LMI premium to your loan amount, which is called capitalising the LMI. In some cases, you may be able to pay it upfront instead. Your choice affects your starting loan balance and your repayments over time.
Some first-home buyers may avoid LMI by saving a 20% deposit, using a government guarantee scheme, receiving help from a family guarantee, or adjusting the purchase price or location. Whether these are available depends on your situation and the lender’s policies.
If you refinance with a new lender while your loan is still above 80% LVR, you may have to pay LMI again. If your LVR is at or below 80%, LMI generally does not apply, but each lender will assess your application under its own criteria.
In most cases, LMI is not refundable. Some insurers may offer partial refunds within a short timeframe if the loan is closed very early, but this is not guaranteed and depends on the insurer’s rules at the time.
For owner-occupied home loans, LMI is generally not tax-deductible. For investment properties, some borrowers may be able to claim LMI as a tax deduction over a period of time. You should confirm this with a registered tax agent or the ATO for advice specific to your circumstances.