Lenders Mortgage Insurance: what it costs and who it protects

Lenders mortgage insurance is a one-off insurance premium charged to a borrower when the deposit is small, which insures the lender against loss if the loan is not repaid and the property is later sold for less than the outstanding debt. The borrower pays the premium. The lender is the insured party. If the property is sold at a loss and the insurer pays the lender, the insurer may then pursue the borrower for that amount.

That asymmetry is the single most misunderstood feature of the product, and it is worth stating plainly before any discussion of cost. Lenders mortgage insurance is not mortgage protection insurance, income protection insurance or life insurance. It provides the borrower with no cover of any kind. What it provides is access: without it, most Australian lenders will not advance more than 80 per cent of a property's value.

When lenders mortgage insurance applies

The trigger is the loan to value ratio, which is the loan divided by the lower of the purchase price and the lender's valuation. Where that ratio exceeds 80 per cent, mortgage insurance is generally required. Where it is 80 per cent or below, it is not.

The threshold is a matter of credit policy and capital treatment rather than law. Lending above 80 per cent without insurance attracts a higher capital charge for an authorised deposit-taking institution, so the cost is either insured or priced in. A handful of lenders lend above 80 per cent without an insurance policy and instead charge an equivalent fee, sometimes described as a risk fee or a low deposit premium. The economics for the borrower are similar.

Because the ratio is measured against the lower of price and valuation, a valuation below the contract price can push a borrower into mortgage insurance even where the deposit appeared sufficient. The guide to property valuations for home loans examines how that happens and what can be done about it, and the LMI calculator shows the premium at each ratio.

Who provides mortgage insurance in Australia

The Australian market is concentrated. Three insurers are authorised by the Australian Prudential Regulation Authority to write lenders mortgage insurance: Helia, which traded as Genworth until 2021 and has operated in the market since 1965; QBE Lenders Mortgage Insurance, part of the QBE group; and Arch Lenders Mortgage Indemnity, which received APRA authorisation in 2019 and acquired the Westpac mortgage insurance business in 2021. Several of the largest banks also self-insure part of their low deposit lending through captive arrangements.

Borrowers do not choose the insurer. The lender selects it, and the lender's arrangement with that insurer determines both the premium and the credit criteria applied. This is one reason premiums for the same borrower differ between lenders, and why an application declined by the insurer behind one lender may be accepted elsewhere.

How the premium is calculated

Premiums are set from a rate table rather than assessed individually. The two main variables are the loan to value ratio and the loan size, and the premium is expressed as a percentage of the loan amount. Other factors that commonly affect the rate include whether the loan is for an owner-occupied or investment property, whether repayments are principal and interest or interest only, whether the applicant is self-employed, and the property type.

The critical feature of the rate table is that it is not linear. The percentage charged rises sharply as the ratio increases, and it rises again as the loan grows. A borrower moving from a 10 per cent deposit to a 5 per cent deposit does not pay a little more; on typical rates the premium roughly doubles.

Indicative premiums on a $750,000 purchase

The following figures are illustrative only and use the indicative premium table behind this site's calculator. Actual premiums vary by lender, insurer and applicant, and stamp duty on the premium applies in most states. The table assumes an owner-occupied purchase with principal and interest repayments.

Deposit	Loan to value ratio	Loan	Indicative premium	Premium as a share of the loan
$150,000 (20 per cent)	80 per cent	$600,000	Nil	Nil
$112,500 (15 per cent)	85 per cent	$637,500	$5,738	0.90 per cent
$75,000 (10 per cent)	90 per cent	$675,000	$12,150	1.80 per cent
$37,500 (5 per cent)	95 per cent	$712,500	$26,362	3.70 per cent

Two observations follow from the shape of that table. The first is that the step from a 15 per cent deposit to a 10 per cent deposit costs roughly $6,400 in premium, while the step from 10 per cent to 5 per cent costs roughly a further $14,200. The second is more striking: at a 5 per cent deposit the premium of about $26,400 equals roughly 70 per cent of the $37,500 deposit itself. A borrower in that position is paying most of a second deposit for the privilege of using the first one.

Loan size matters independently of the ratio. At a 90 per cent ratio, the indicative premium on a $500,000 purchase is about $6,300, on a $1,000,000 purchase about $16,200, and on a $1,200,000 purchase about $22,680, because the rate itself steps up as the loan crosses each band.

Capitalising the premium and what it actually costs

Most borrowers do not pay the premium in cash. It is added to the loan, a practice known as capitalising, which means it is then repaid with interest over the full term. Lenders commonly allow the loan to exceed the usual maximum ratio by the amount of the capitalised premium.

Capitalising changes the real cost considerably. Using the 90 per cent example above, a $675,000 loan at an assumed 6.00 per cent over 30 years requires about $4,047 a month. Adding the $12,150 premium raises that to about $4,120, an increase of roughly $73 a month. Over the full 30 years, the capitalised premium costs about $26,200 rather than $12,150.

At a 5 per cent deposit the effect is larger. The $26,362 premium adds about $158 a month to a $712,500 loan and roughly $56,900 over 30 years on the same assumptions. These are illustrative figures at a constant assumed rate, and most borrowers refinance or sell well before 30 years, which reduces the compounding. They nonetheless show that the headline premium understates the cost of capitalising it.

Refunds, transfers and refinancing

A mortgage insurance policy attaches to a specific loan with a specific lender. It does not belong to the borrower and it does not follow the borrower. Two consequences are worth planning for.

• The premium is not transferable. A borrower who refinances to another lender while still above 80 per cent will generally pay a new premium to the new lender's insurer. Paying mortgage insurance twice within a few years is a common and avoidable cost, and it is one reason a borrower with a low deposit may be better served by a lender they can stay with. The article on the cost of remaining with an existing lender considers the other side of that trade-off.
• Partial refunds are limited and discretionary. Insurers have historically offered a partial refund where a loan is discharged in full within the first one or two years, with the proportion falling as time passes. Refund policies differ by insurer and lender, have been narrowed over time, and some arrangements no longer offer a refund at all. A borrower who expects to sell within two years should ask the lender in writing what the policy provides before settlement rather than assuming a refund exists.

A borrower whose property has risen in value cannot have mortgage insurance refunded on the basis of the increase. The premium was paid once for the original ratio. What a higher valuation can do is remove the need for a new premium on a future refinance, which is covered in the guide on how to refinance a home loan.

Ways to reduce or avoid the premium

There are five established routes, and their relative merit depends entirely on circumstances.

1. A deposit of 20 per cent. The simplest and, for those who can reach it within a reasonable period, usually the cheapest. On the example above, saving a further $75,000 avoids a $12,150 premium and reduces the loan, lowering repayments by roughly $520 a month at the assumed rate.
2. A government guarantee. Under the scheme now known as the Australian Government 5% Deposit Scheme, described in the guide to the 5% Deposit Scheme, the Commonwealth guarantees part of the loan so that eligible buyers purchase with a 5 per cent deposit without mortgage insurance. Property price caps apply.
3. A family guarantee. A parent or close relative offers additional security over their own property, which lowers the ratio against the combined security below 80 per cent. The structure, and its considerable risks for the guarantor, are set out in the guide to guarantor home loans.
4. A lender waiver for certain occupations. Some lenders waive mortgage insurance up to a ratio of 90 per cent, and occasionally higher, for borrowers in particular professions. Medical practitioners are the longest standing category; various lenders extend waivers to other professions, sometimes subject to minimum income or membership of a professional body. These are commercial policies that change frequently and are not published consistently, so they must be confirmed lender by lender.
5. Buying a less expensive property. Arithmetically obvious and frequently overlooked. The property affordability calculator works backwards from a deposit and a sustainable repayment to a purchase price at which no premium arises.

Paying the premium compared with waiting to save

The question is rarely whether mortgage insurance is expensive. It is whether it is more expensive than the alternative, which for most buyers is continuing to rent while saving a larger deposit.

On the illustrative figures above, moving from a 10 per cent deposit to a 20 per cent deposit on a $750,000 purchase requires a further $75,000. A household saving $2,000 a month would need about 37 months. Over that period the relevant comparison is not simply $12,150 of premium. It includes rent paid in the interim, any movement in property prices in the target area, and the interest not paid on a loan not yet taken.

There is no general answer, because it depends on whether prices in the relevant market rise faster than the household saves. What can be said is that the calculation should be done explicitly rather than assumed in either direction. A buyer who avoids a $12,150 premium while the target market rises 10 per cent has not saved money. A buyer who pays $26,400 at a 95 per cent ratio in a flat market has paid a great deal for timing. The deposit calculator and the mortgage repayment calculator allow both paths to be modelled, and the property market section provides context on price movements.

What mortgage insurance does not do

• It does not protect the borrower. If the borrower cannot pay, the policy pays the lender's shortfall, not the borrower's debt. The insurer may then seek that amount from the borrower.
• It does not reduce the interest rate. Loans above 80 per cent are frequently priced above the lender's lowest advertised rates, so the premium is often accompanied by a higher rate rather than offset by one.
• It does not remove the need for genuine savings. Many lenders still require part of the deposit to have been accumulated over three to six months, separately from any grant or gift.
• It is not refundable because prices rose. The premium relates to the original ratio at settlement.
• It does not follow the loan. Refinancing to another lender above 80 per cent generally means a new premium.

Questions to ask before paying a premium

Before committing, it is reasonable to ask the lender or broker for the following in writing:

• the exact premium at the proposed ratio, and the premium at the next ratio band down, so the cost of finding a slightly larger deposit is visible;
• whether stamp duty on the premium is included in the figure quoted;
• whether the premium will be capitalised, and the repayment with and without capitalisation;
• the interest rate offered at this ratio compared with the rate the same lender offers at 80 per cent;
• the refund policy if the loan is discharged within one and two years;
• whether the lender offers any waiver for the borrower's occupation, and whether the borrower is eligible for a government guarantee instead.

Mortgage insurance is a legitimate product that has allowed a great many households to buy earlier than they otherwise could. It is also expensive, poorly understood and charged to the party it does not protect. Both statements are true at once, and the decision turns on the size of the premium relative to the cost of waiting in a particular market. Borrowers who would like that comparison prepared for their circumstances may request a free assessment from an accredited broker. This article is general information and does not take account of individual objectives or circumstances.