| Deposit | LVR | Loan | Premium rate | LMI |
|---|
How lenders price LMI
Two numbers set your premium: your loan-to-value ratio, and the size of the loan. Most calculators only use the first, which is why they can be a long way out on larger loans. At 90% LVR the published rate runs from about 1.46% of the loan on a small loan to about 2.52% once the loan passes $750,000. On a $675,000 loan that difference is worth thousands.
The rate is applied to the loan amount, not the property price, and not the shortfall below 20%. That catches people out. A 5% deposit does not cost you a premium on the missing 15%, it costs you a percentage of the entire 95% loan.
The 85%, 90% and 95% LMI cliffs
Premiums step up hard at 85%, 90% and 95% LVR. Between 89.01% and 90% the rate is roughly 1.5% to 2.5% of the loan depending on size. Cross into 90.01% and it jumps to roughly 2% to 3.8%. Finding another few thousand dollars of deposit to stay under a threshold is often worth far more than the deposit itself.
When paying LMI is the right call
The standard line is to save 20% and avoid it. For an investor building a portfolio that is not always the better maths. Going in at 10% instead of 20% on a $750,000 purchase frees roughly $75,000 of cash for the cost of the premium. Whether that trade works depends on what the freed cash does next and what the market does in the meantime, which is a conversation for your broker and your accountant, not a rule of thumb.
Work out the rest of your settlement cash with the upfront cost calculator, check what you can borrow with the investment property calculators, or read how investors use equity instead of a cash deposit.
It depends on the lender more than most people expect. On the rate card this page uses, a 90% LVR loan runs from about 1.463% of the loan up to $300,000 to about 2.516% between $750,000 and $1 million, so a $675,000 loan lands near $16,000. Other published comparisons put the same loan closer to $28,000, because insurers and lenders price the same LVR very differently. Budget a range and get a quote from your broker.
No. At 80% LVR or below there is no LMI. That is the whole reason 20% is the number everyone quotes. Some lenders also waive it above 80% for certain professions, and a guarantor can remove it without you reaching 20%.
The loan. The premium rate is applied to the full loan amount, not to the property price and not to the gap below a 20% deposit. This is the single most common misunderstanding about how LMI is calculated.
Most lenders allow it, which is called capitalising the premium. It keeps cash in your pocket at settlement, but you pay interest on the premium for as long as you hold the loan, so the true cost is higher than the premium itself.
Partial refunds exist with some insurers if the loan is discharged within the first year or two, but they are limited and many lenders no longer offer them. Treat the premium as a sunk cost when you are deciding.
LMI on an investment loan is generally treated as a borrowing expense and claimed over five years, or the loan term if shorter, rather than deducted in full in year one. Confirm the treatment for your circumstances with your accountant.