Deposits and lenders mortgage insurance

When buying property, the deposit is more than a savings milestone. It directly affects your borrowing strength, loan costs and risk profile.

Understanding how deposit size interacts with Lenders Mortgage Insurance, LMI, allows you to make a strategic decision rather than chasing a single “ideal” percentage.

There is no universal rule. There is only what fits your position.

Your deposit is the portion of the purchase price you contribute upfront.

For example:

• Buying at $800,000 with a $160,000 deposit means you’re borrowing 80 per cent
• Buying at $800,000 with an $80,000 deposit means you’re borrowing 90 per cent

The percentage you borrow is known as your loan-to-value ratio, LVR.

Loan-to-Value Ratio (LVR) influences:

• Whether LMI applies
• Your interest rate
• Your lender options
• Your long-term flexibility

Many buyers believe you must have a 20 per cent deposit to buy property.

In reality:

• You can often buy with 5 to 10 per cent saved
• Some lenders allow 95 per cent LVR
• Government schemes may reduce deposit requirements further

What changes below 80 per cent LVR is Lenders Mortgage Insurance.

Twenty per cent is not a rule. It’s simply the point at which LMI usually disappears.

Lenders Mortgage Insurance protects the lender, not you, if you default on the loan.

It applies when your LVR is typically above 80 per cent.

The cost depends on:

• Your deposit percentage
• Loan size
• Whether you are an owner-occupier or investor
• Your employment type

For example:

• On an $800,000 property with a 10 per cent deposit, LMI could range from approximately $15,000 to $25,000 depending on lender and risk profile
• At 15 per cent deposit, LMI reduces significantly
• At 20 per cent deposit, LMI is usually not required

LMI can be paid upfront or capitalised into the loan, increasing total repayments over time.

LMI is often viewed negatively, but in some cases it can be a strategic tool.

Paying LMI may make sense if:

• Property prices are rising faster than you can save
• Waiting another two years means paying significantly more
• You want to enter the market sooner for lifestyle reasons
• You have strong income but a shorter savings history

For example, if property prices increase 5 per cent annually, waiting two years on an $800,000 property could mean paying roughly $40,000 more. In that context, a $20,000 LMI premium may be commercially reasonable.

The key is comparing long-term cost, not just upfront discomfort.

Avoiding LMI may be the better option if:

• Paying it would leave you with no financial buffer
• Your income is unstable
• You’re stretching to your maximum borrowing capacity
• You’re buying in a highly volatile market

Entering the market sooner only makes sense if you can comfortably hold the property.

Liquidity after settlement matters.

Some buyers reduce or eliminate LMI using a family guarantee.

This allows:

• A smaller cash deposit
• A lower effective LVR
• Avoidance of LMI

However, it introduces shared financial risk. If you default, the guarantor may be liable for part of the loan.

Family support can be powerful, but it should be structured carefully and documented clearly.

Your deposit is not your only upfront expense.

You should also budget for:

• Stamp duty or transfer duty
• Conveyancing or legal fees
• Building and pest inspections
• Loan establishment fees
• Moving costs
• Insurance

On an $800,000 purchase, upfront costs beyond the deposit can easily range from $25,000 to $40,000 depending on state and eligibility.

Avoid committing your entire savings to the deposit without accounting for these.

One of the most overlooked parts of deposit strategy is what remains after settlement.

Ideally, maintain:

• At least three months of living expenses
• An emergency buffer
• Funds for minor repairs or adjustments

Ownership brings flexibility, but it also brings responsibility.

A slightly smaller deposit with a healthy buffer is often stronger than a perfect 20 per cent with no reserves.