What is lenders mortgage insurance (LMI)?

Lenders mortgage insurance (LMI) is an insurance policy that protects the lender, not the borrower, if you fail to repay your home loan. When you borrow more than 80% of a property's value (known as the loan-to-value ratio or LVR), most lenders require LMI as a condition of the loan. This is because lending above 80% LVR carries higher risk for the bank.

The insurance premium is calculated based on the loan amount, property value, and LVR. This cost is typically added to your loan balance and paid off over the life of the mortgage, rather than as an upfront cash payment. In Sydney's property market, where many buyers have limited deposits, LMI is common, particularly among first home buyers who may only have saved a 10-20% deposit.

It is important to understand that LMI exists solely to protect the lender's interests. The team pay the premium but receive no direct benefit. The insurance sits between you and the bank, stepping in only if the lender forecloses and recovers less than the full loan amount through sale of the property. Once you refinance or your loan falls below 80% LVR through additional payments or property value growth, you cannot claim back LMI already paid.