PMI means private mortgage insurance, a US product that protects a lender against losses when a borrower defaults. Australia uses lenders mortgage insurance (LMI) for that purpose.
The borrower usually pays for LMI, but receives no insurance cover. Australian payment and refund terms also differ from the US rules commonly described online.
What PMI Means in Australia
The Australian equivalent of PMI is LMI. It compensates the lender when a borrower defaults and the property sale leaves an unpaid loan balance.
LMI does not pay your repayments if you lose your job or become ill. The insurer can also seek repayment of the shortfall from you, as QBE explains in its LMI guide.
The US abbreviation means private mortgage insurance. Terms such as personal, primary or prime mortgage insurance are not the Australian name for this cover. For the local policy details, read the lenders mortgage insurance guide.
When Lenders Charge It
Lenders commonly charge LMI above an 80% loan-to-value ratio (LVR). LVR is the loan amount divided by the lender's property valuation, expressed as a percentage.
For example, a $400,000 loan against a $500,000 property has an LVR of 80%: $400,000 divided by $500,000 equals 0.80. Borrowing more against that same valuation takes the LVR above 80%.
The 80% threshold is lender policy, not a legal requirement for every home loan. Some lenders apply a lower LMI threshold to low doc loans, where borrowers supply alternative income documents.
Use the lender's valuation and loan amount in the LVR calculation. A purchase price alone does not establish the lender's LVR.
How the Premium Works
Australian LMI is normally a one-off premium charged at settlement. You can pay it upfront or, with lender approval, capitalise it by adding it to the loan.
Capitalising LMI preserves cash at settlement but increases the debt on which you pay interest. Some lenders also have monthly LMI options, so the payment arrangement depends on the product.
Australian LMI has no US-style automatic cancellation rule at 78% of the property's original value. Paying the balance down does not automatically return a one-off premium.
Any refund depends on the insurer and lender arrangement, and many lenders give none. Helia's refund guidance allows for a partial refund in some circumstances, but excludes arrangements with an upfront discount instead.
QBE also makes refunds conditional on its agreement with the lender. The LMI guide covers refund conditions in more detail. Refinancing into another loan that requires LMI can trigger a fresh premium.
What It Costs
LMI cost depends on the loan amount, LVR band, loan purpose and property type. A larger deposit can move the loan into a lower premium band.
US PMI rates and annual percentages do not give you an Australian LMI quote. Obtain a lender or insurer quote for the actual loan before budgeting for the premium.
Compare the upfront premium with the capitalised option, including the interest charged on the added amount. An online estimate helps with planning, but the lender's quote determines what you pay.
Who Underwrites It
Helia and QBE are the main Australian LMI writers. Helia formerly traded as Genworth, so older material using that name concerns the same provider.
The lender arranges the policy and its agreement with the insurer determines the terms passed to the borrower. You generally choose the loan and lender, rather than buy LMI independently.
Treat older premium figures as indicative. A quote for a different loan size or LVR can also give the wrong cost for your application.
Weighing the Trade-Off
LMI can let you buy sooner with a smaller deposit. The decision is whether that earlier purchase is worth the premium and any interest on a capitalised amount.
The premium pays for cover that protects only the lender. Any refund depends on the insurer and lender arrangement, and many lenders give none. Do not budget on recovering the premium when you sell or refinance.
A guarantor arrangement can reduce or remove LMI, but puts the guarantor's secured property at risk. Eligible government home guarantee schemes can also permit a smaller deposit without LMI.
Compare those alternatives with continuing to save. Include purchase costs and an emergency cash buffer when deciding how much deposit to use.
Managing the Cost
Deposit size is usually the biggest lever for reducing LMI. Ask how the premium changes if a smaller loan moves you into the next LVR band.
Paying upfront avoids interest on a capitalised premium, while adding it to the loan preserves cash. Compare both options over the period you expect to keep the loan.
Your credit score and repayment history affect loan approval. The LMI premium follows loan size and LVR, rather than a US-style credit-score-based PMI rate.
Some lenders permit eligible borrowers to borrow at 85% or 90% LVR without LMI under their own policies. Occupation-based waivers have separate criteria, covered in the LMI waiver guide.
For example, Westpac's waiver policies permit 90% LVR for eligible accounting and legal professionals, subject to accreditation and income requirements.
Request written quotes for both payment options and compare the interest rate and fees across lenders. A loan without LMI can still cost more over your expected holding period.
