A couple sat across from me a few years back with a spreadsheet they were genuinely proud of. They had $62,000 put away and a plan to hit $110,000 by the end of the following year. Full twenty per cent deposit, no insurance premium, clean and tidy. I get it. Nobody wants to hand a bank an extra twelve grand for a policy that does not protect them. But LMI on an investment property is one of the most misunderstood costs in Australian property, and their spreadsheet was about to teach them why.
Eighteen months later they had their $110,000. The corridor they had been watching in Brisbane had moved by roughly $95,000 over the same stretch.
They did everything right on paper and still went backwards.
I have seen this play out dozens of times. Someone treats the insurance premium as the villain, spends two years avoiding it, and quietly pays a much larger price somewhere else. Meanwhile someone else pays the premium, buys eighteen months earlier, and never thinks about it again.
So let me walk you through what this cost actually is, what it really runs to, when it earns its keep, and when it is a genuinely bad idea.
What LMI on an Investment Property Actually Is
Lenders Mortgage Insurance is a one off premium the bank charges when you borrow more than eighty per cent of a property’s value. Your loan to value ratio, or LVR, is the number that triggers it. Borrow $400,000 against a $500,000 purchase and your LVR is eighty per cent. Borrow $450,000 and you are at ninety per cent, and the premium appears.
Here is what most people get wrong about it. The policy does not protect you. It protects the lender. If the loan goes bad and the bank sells the property for less than it is owed, the insurer covers the shortfall and then comes after you for it. You pay the premium, the bank gets the safety net.
That feels unfair, and I understand why people bristle at it. But being annoyed about who benefits from a cost is a separate question from whether paying it is the right call for your situation.
The premium is almost always capitalised, meaning it gets added to your loan rather than paid in cash at settlement. You are financing it over the life of the loan. That is worth understanding before you look at the sticker price, because the weekly impact is smaller than the headline number suggests. The Australian Government MoneySmart guide to lenders mortgage insurance is a solid neutral explainer if you want the mechanics from an official source.
One thing that catches investors specifically: insurers apply a loading to investment loans because they see them as higher risk than owner occupier lending. Depending on the insurer and the deal, expect the premium on an investment purchase to run somewhere between ten and twenty per cent higher than the equivalent owner occupier figure.
What It Actually Costs
Numbers help more than theory here, so let me put some on the table. These are indicative, and the exact figure depends on your lender, your insurer, the state, and the loan size, but the shape is right.
On a $650,000 purchase:
- At ninety per cent LVR (a $65,000 deposit), you are looking at roughly $13,000 to $16,000 in premium
- At eighty five per cent LVR (a $97,500 deposit), the premium drops to somewhere around $7,000 to $9,000
- At eighty per cent LVR (a $130,000 deposit), nothing
Notice how sharply the cost falls between ninety and eighty five per cent. That middle band is where a lot of value sits, and it is the band most investors never think about because they are stuck in a binary between “twenty per cent” and “as little as possible”.
Then there is the tax side, and this is where a lot of investors underestimate the true position. The premium is treated as a borrowing expense, not a property expense, which means you claim it over five years or the term of the loan, whichever is shorter. The ATO guidance on residential rental property expenses sets out how borrowing expenses are handled.
Run that through a real tax position. A $14,000 premium claimed over five years is $2,800 a year in deductions. On a 37 per cent marginal rate that is about $1,036 back each year, or a bit over $5,000 across the five years. Your $14,000 cost is closer to $9,000 after tax.
That changes the conversation. It does not make the premium free, but it does mean the number people argue about is not the number they actually pay.
When Paying LMI on an Investment Property Makes Sense
I want to be careful here, because “just pay it” is lazy advice and so is “never pay it”. The answer depends on three things: what the market is doing, what the asset is, and what you plan to do next.
The market is moving faster than you can save
This is the situation that couple was in. If you are saving $2,000 a month and the market segment you are buying into is adding $2,500 a month in value, you are running on a treadmill. Every month of delay costs more than it saves. Paying the premium to get in twelve or eighteen months earlier is not reckless in that environment, it is arithmetic.
Where folks get caught off guard is assuming this is always true. It is not. In a flat or falling market, waiting and saving genuinely wins. That is why understanding where the property market cycle sits matters more than any rule of thumb about deposits.
You want to keep cash for the next purchase
This one applies to investors with one or two properties already who are trying to keep momentum. If you have $180,000 available and you tip all of it into one purchase to avoid the premium, you have one property and no cash. Split it across two purchases at eighty five or ninety per cent and you have two assets working, two rental incomes, and two chances at growth.
That is the deposit recycling logic behind how a lot of portfolios actually get built. If you are working through this stage, the piece on how to scale a property portfolio past two properties covers the structural side in more detail.
The asset is genuinely worth it
This is the one that matters most, and it is the one people skip. Paying a premium to buy faster only works if what you buy actually grows. Pay $14,000 to rush into a poorly located apartment in an oversupplied pocket and you have simply paid extra to make a mistake sooner.
Our average deal return sits at 22.35 per cent against a market growing at around six per cent, and that gap does not come from clever finance structuring. It comes from asset selection. The finance decision sits downstream of the buying decision, always. If you are not confident you can identify investment grade property, sort that out before you worry about deposit percentages.
When You Should Not Pay It
Three situations where I would push back hard.
You are already stretched. If the premium pushes your borrowings to a point where a rate move or two months of vacancy would hurt, the premium is not the problem. The buffer is. Work out your true holding costs on an investment property first, then decide.
You are buying to avoid missing out. If the driver is fear rather than a plan, a higher LVR just amplifies whatever mistake you were about to make. Get the strategy settled first.
You have equity sitting idle. A lot of investors pay a premium unnecessarily because they have not looked properly at what their existing property can release. Understanding how to use equity to buy an investment property can take you to eighty per cent without touching cash savings. Just be careful about how the lender structures it, because cross securitising your loans creates problems you will feel three purchases from now.
The Borrowing Capacity Trade Off Nobody Mentions
This is the part that gets missed in most articles on the subject, and it is the part that bites scaling investors.
Capitalising the premium increases your loan. A larger loan means larger repayments, and larger repayments reduce what a lender will let you borrow next time. Pay $15,000 in premium across two purchases and you have added $30,000 in debt that the servicing calculators will hold against you.
For your first property, that trade off is usually fine. By your third or fourth, it can be the difference between getting the next loan approved and being told no. If you are approaching that ceiling, the work on how to increase your borrowing capacity becomes more valuable than shaving a few thousand off a premium.
The logic is fairly straightforward. Early on, time in the market beats capital efficiency. Later on, capital efficiency beats time in the market. Most investors apply the wrong one at the wrong stage.
Ways to Reduce or Avoid the Premium Entirely
Before you accept the number your broker quotes, run through this list:
Move to eighty five per cent. As the figures above show, the drop between ninety and eighty five is steep. Finding an extra $20,000 to $30,000 can halve the premium.
Check your occupation. A number of lenders waive the premium up to ninety per cent, and sometimes ninety five, for medical professionals, lawyers, accountants and a few other categories. Plenty of people who qualify never ask.
Use a family guarantee. A parent offering security over part of their property can lift you to eighty per cent without cash. It carries real risk for them, so this needs proper advice, but it is a legitimate option.
Release equity instead. If you own property, an equity release at eighty per cent on the existing asset can fund the deposit on the new one without any premium on either.
Compare insurers, not just lenders. Two banks with near identical rates can have materially different premiums because they use different insurers. Your broker can run both.
How I Actually Think About It
After thirteen years buying property for clients, my position on this has settled into something fairly simple.
The premium is a cost of entry, not a penalty. Compare it against the cost of the delay it removes. If a year of waiting costs you more in growth than the premium costs in dollars, pay it and stop agonising. If the market is flat, or the asset is average, or your buffer is thin, wait.
What I will not do is let a client pay a premium to buy something ordinary. That is the failure mode. The cost only ever makes sense in service of a good asset, bought at the right time, in a market with something in front of it. And that is where most people come unstuck: they spend six months debating deposit percentages and about six minutes choosing the actual property.
Get the asset right and the finance question mostly answers itself.
Frequently Asked Questions
Is LMI on an investment property tax deductible?
Yes, but not all at once. The ATO treats it as a borrowing expense, so you claim it over five years or the loan term, whichever is shorter. On a $14,000 premium that is $2,800 a year in deductions, which on a 37 per cent marginal rate is worth roughly $1,000 back annually. Worth confirming the specifics with your accountant, since your circumstances change the maths. The broader picture on investment property tax deductions is worth reading alongside this.
How much deposit do I need to avoid LMI on an investment property?
Twenty per cent of the purchase price plus your buying costs, which in most states means closer to twenty five per cent all up once stamp duty, legals and inspections are counted. On a $650,000 purchase that is around $130,000 in deposit and another $30,000 or so in costs. Some lenders will go to eighty five per cent with a much smaller premium, which is often the sweet spot.
Does paying LMI hurt my ability to buy the next property?
It can. The premium is usually added to your loan, which increases your debt and your repayments, and servicing calculators factor both in. For a first purchase the impact is minor. By your third or fourth, it can genuinely restrict what a lender will approve, so it needs to be part of a longer plan rather than a one off decision.
Can I get a refund if I sell or refinance early?
Some insurers offer a partial refund if the loan is discharged within the first year or two, though the amounts are small and many have removed the option entirely. Do not build your plan around it. Treat the premium as spent money the day you settle.
Key Takeaways: LMI on an Investment Property
- Lenders Mortgage Insurance protects your lender rather than you, and applies whenever you borrow more than eighty per cent of a property’s value.
- Investment loans attract a loading of roughly ten to twenty per cent over the equivalent owner occupier premium, so investors pay more for the same LVR.
- The premium is claimable as a borrowing expense over five years, which can cut the real cost by around a third for investors on higher marginal rates.
- Paying the premium makes sense when the market is growing faster than you can save, when you want to preserve cash for a second purchase, and when the asset itself is genuinely investment grade.
- Capitalising the premium reduces your borrowing capacity for future purchases, which matters far more at property three or four than it does at property one.
- Moving from ninety to eighty five per cent LVR, checking for occupation based waivers, or releasing existing equity can cut or remove the premium entirely.
LMI on an Investment Property: Final Thoughts
The premium is not the enemy, and it is not free money either. It is a lever with a price attached, and whether pulling it is smart depends entirely on what you are buying and what the market underneath it is doing.
To be honest with you, I think the bigger risk for most investors is not paying too much insurance. It is spending years optimising a five figure cost while a six figure opportunity walks past. That couple with the spreadsheet were careful, disciplined people. Their discipline cost them more than any premium would have.
The flip side is just as real. I have watched people stretch to ninety five per cent on a property that was never going to grow, and no amount of clever structuring saves that. The asset carries the outcome. The finance just determines how quickly you get to it and how much room you have afterwards.
If you are sitting on a deposit right now, unsure whether to buy or keep saving, the question to answer first is not the deposit percentage. It is whether you can identify a property worth buying at all, and whether your position can carry it comfortably if rates move or a tenant leaves. Get honest answers to those, and the deposit question becomes much less fraught.
That is the work we do every day at Property Principles, and it is the reason our clients tend to move faster and with fewer regrets than people trying to piece it together alone. If you want a clear read on where you stand and what your next move should be, Book a discovery call with Property Principles here.
