Deposit size, LVR and lenders mortgage insurance: what a bigger deposit saves
How loan-to-value ratio sets your home loan rate tier and LMI in Australia, what LMI covers, ways to avoid it, and a worked example on an $800,000 purchase.
Your deposit decides your loan-to-value ratio (LVR): the loan amount divided by the lender's valuation of the property. Most Australian lenders charge lenders mortgage insurance (LMI) when the LVR is above 80%, and many price their rates in LVR bands, so a smaller deposit can cost you twice: a one-off LMI premium and a higher rate for years. The way around LMI is a 20% deposit, an eligible government guarantee, a family guarantor or a profession-based LMI waiver. Whether waiting to save more is worth it depends on how fast you can save compared with how fast prices and rents move.
This guide is part of home loan rates and repayments in Australia. Prices, rates and LMI amounts below are illustrative.
How LVR is calculated
Two details catch people out:
- The lender uses its own valuation, not necessarily the price you pay. If you pay $820,000 and the valuer says $800,000, the LVR is calculated on $800,000, so you need more deposit to stay under 80%.
- Purchase costs are on top. Stamp duty (transfer duty), conveyancing and inspection costs usually come from your savings, not the loan. A deposit of 20% of the price is not enough if you also need to pay duty from the same savings.
Worked example: $800,000 purchase
| Deposit | Loan | LVR | LMI? | Repayment at 6.00%, 30 years | Total interest |
|---|---|---|---|---|---|
| $80,000 (10%) | $720,000 | 90% | Yes | $4,316.76 | $834,035 |
| $120,000 (15%) | $680,000 | 85% | Yes | $4,076.94 | $787,700 |
| $160,000 (20%) | $640,000 | 80% | Usually no | $3,837.12 | $741,364 |
Moving from a 10% to a 20% deposit lowers the repayment by about $480 a month and total interest by about $92,700, even before LMI or any rate difference.
Now add the costs that come with the 10% deposit. Suppose, for illustration only, that LMI is quoted at $15,000 and added to the loan, and the lender's rate for loans above 80% LVR is 0.20 points higher:
- New loan: $720,000 + $15,000 = $735,000
- At 6.20% over 30 years: about $4,501.65 a month
- Compared with the 20% deposit loan at 6.00%: about $664 a month more
- The $15,000 of LMI itself, repaid over 30 years at 6%, costs about $32,400 in total repayments
Actual LMI premiums depend on the insurer, the LVR, the loan size and your circumstances, and some states charge stamp duty on the LMI premium. Ask the lender for an LMI quote in writing.
What LMI is, and what it is not
- LMI protects the lender, not you. If you default and the sale does not cover the debt, the insurer pays the lender and may pursue you for the shortfall.
- It is usually a one-off premium, paid at settlement or added to the loan.
- It is generally not refundable if you refinance or sell early, though some insurers give a partial refund within the first year or two. If you later refinance above 80% LVR with a new lender, you may have to pay LMI again.
- Some lenders charge a low-deposit premium (a higher rate) instead of or as well as LMI.
Ways to avoid or reduce LMI
| Option | How it works | Watch out for |
|---|---|---|
| Save to 20% | No LMI at most lenders | Prices may rise while you save |
| Home Guarantee Scheme | Government guarantees part of the loan so eligible buyers can borrow with 5% deposit (2% for the Family Home Guarantee) and no LMI | Property price caps and eligibility rules; see first home buyer schemes |
| Family guarantee | A parent offers equity in their home as extra security for part of your loan | The guarantor's home is at risk if you default; they should get independent legal advice |
| Profession-based waiver | Some lenders waive LMI for certain professions, for example some medical, legal or accounting roles, up to a set LVR | Conditions and eligible professions differ by lender |
| Lower the price | Buying for less brings the LVR under 80% | Check the valuation, not just the price |
When paying LMI can make sense
Paying LMI is not automatically a mistake. If saving the extra 10% would take three years and prices in your area are rising, the LMI may cost less than waiting. Run both paths:
- Cost of buying now: LMI + higher repayments for the years at a higher LVR tier.
- Cost of waiting: rent paid while you save + any price rise on the kind of home you want.
As your loan falls and the value rises, your LVR improves. Once it is under 80%, ask your lender for a rate review in the lower LVR band, and a new valuation if values have risen. The loyalty tax guide explains how to ask.
Frequently asked questions
Is LMI tax deductible?
For an investment property, the ATO generally treats LMI as a borrowing expense that is claimed over five years or the loan term if shorter. For your own home it is not deductible. Check with a registered tax agent.
Does LMI protect me if I lose my job?
No. That is a different product, sometimes called mortgage protection or income protection insurance. LMI protects the lender only.
Can I get LMI refunded if I sell?
Usually not, beyond any partial refund the insurer offers in the first years. Ask the lender which insurer is used and its refund policy.
What LVR do lenders allow?
Many lenders lend up to 90% or 95% LVR for owner-occupiers with LMI, and less for investors or certain property types such as small apartments. Policies change, so check with the lender or a broker.
Sources
- ASIC Moneysmart — deposits, LMI and guarantors
- Housing Australia — Home Guarantee Scheme
- Australian Taxation Office — borrowing expenses on rental properties
- APRA — prudential standards for residential mortgage lending
