In short
- You will usually meet this insurance when you borrow more than 80 per cent of a property’s value.
- It is a lender’s practice, not a law, and the rules differ between lenders.
- It covers the lender, and you usually pay for it.
- A bigger deposit, or equity you already hold, can keep you under the line.
You have saved part of a deposit, and every article says 20 per cent. So you start to wonder whether to wait another two or three years. Before you decide, it helps to know what happens when you put in less.
What lenders mortgage insurance is
Lenders mortgage insurance is usually called LMI. Lenders usually charge it when a loan is more than 80 per cent of the property’s value.
This is lender practice, not law. No rule from APRA, the banking regulator, says a lender must charge it above 80 per cent.
The insurance protects the lender if you cannot repay the loan. You usually pay its cost, but it does not cover you.
Where the 80 per cent line sits
The line is about the size of the loan against the value of the property. Lenders call this the loan to value ratio, or LVR.
Take a $600,000 property. A $120,000 deposit leaves a loan of $480,000, which is 80 per cent. A $60,000 deposit leaves a loan of $540,000, which is 90 per cent.
| Deposit on $600,000 | Loan | Share of value | LMI usually? |
|---|---|---|---|
| $120,000 | $480,000 | 80% | No |
| $90,000 | $510,000 | 85% | Yes |
| $60,000 | $540,000 | 90% | Yes |
In words: with a $120,000 deposit the loan is 80 per cent of the value, right on the line, and lenders usually do not charge the insurance. With $90,000 the loan is 85 per cent, and with $60,000 it is 90 per cent; at both of those, lenders usually do charge it.
The costs of buying, such as stamp duty and legal fees, come on top of the deposit. They do not lower the loan unless you pay them in cash.
What it costs
The cost depends on the size of your deposit and how much you borrow. Some lenders add it to the loan, so you pay interest on it too.
For an investment property there is also a tax question: whether the cost can be claimed, and over what time. For a loan used to buy a rental property, lenders mortgage insurance billed to you is a borrowing expense. If your borrowing expenses come to more than $100, the deduction is spread over five income years or the term of the loan, whichever is shorter. Your accountant can tell you how it applies to you.
Some lenders waive it for some jobs
Some lenders waive the insurance for some professions. For example, Westpac does this for eligible healthcare and emergency service professionals, up to 90 to 95 per cent of the value. Each lender sets its own list, so ask yours.
First home buyers have a different path
The federal Australian Government 5% Deposit Scheme lets eligible first home buyers buy with a lower deposit and not pay LMI. Since 1 October 2025 it has had no caps on places and no income limits.
That scheme is for first home buyers. It is for a home you buy to live in; investment properties are not eligible.
The two other ways in
The first way is to keep saving until the loan is 80 per cent or less. That avoids the insurance, but it costs you time.
The second way is the equity you may already hold. If you own a home that has grown in value, a lender may release part of that value as a separate loan, and that loan can become the deposit.
That is still borrowed money. Interest on a loan can be claimed to the extent the money is used to earn income, and what the loan is secured on does not decide it. So interest on money borrowed against your home and used to buy a rental property can be claimed.
Paying the insurance is the third way. Some investors choose it because starting sooner can be worth more to them than the cost.
What the bank tests either way
Whichever way you go, the lender tests whether your income carries the loan. Under APRA’s rules, lenders must add a buffer of at least three percentage points to the loan rate for that test.
So a smaller deposit is never only about the insurance. A bigger loan also means bigger repayments, and the test is on all of it.
Where this leaves you
The insurance is not a wall. It is a cost you can weigh against the time it would take to save more, or against using equity you hold.
The useful question is what each choice does to your weekly cash flow, and whether the property still pays its way after the extra cost.
You can get lessons like this one free, by email, one at a time as each is finished. Leave your first name, your email, and whether you are building or retiring, plus your postcode if you would like to know when Nicholas is nearby.
Education only, not personal or financial advice.