Pay LMI Now or Keep Saving for 20%?

The short answer

There's no universal right choice. Paying Lenders Mortgage Insurance (LMI) lets you buy sooner with a smaller deposit, but it's a one-off cost (often $10,000+) that buys you no equity. Saving to 20% LVR avoids LMI entirely, though every extra month of saving is a month you're not building equity, and may be a month of rising prices. The decision turns on three numbers: the LMI premium at your deposit, how fast prices are moving where you're buying, and whether a scheme like the First Home Guarantee can waive LMI for you.

How it works in Australia

LMI is insurance that protects the lender (not you) when your loan is above 80% of the property value, which is to say when your deposit is under 20%. It's charged as a one-off premium calculated from the loan size and your LVR band: the smaller your deposit, the steeper it gets. As a rough guide for 2025-26, premiums run around 1% of the loan at 85% LVR, roughly 1.8-2.2% at 90% LVR, and 4-5% at 95% LVR. The jump between bands is sharp. At 80% LVR or below, LMI is zero.

You can pay LMI upfront in cash or capitalise it into the loan (borrow it), which spreads the cost but means you pay interest on it for years.

Two things can change the maths entirely:

• First Home Guarantee (FHG): From 1 October 2025, eligible first home buyers can buy with as little as a 5% deposit and the government guarantees the gap, so no LMI is payable. This is subject to property price caps (e.g. Sydney $1.5m, Melbourne $950k, Brisbane $1m) and eligibility (Australian citizen/PR, 18+, owner-occupier, not having owned property in the last 10 years). Check current rules at housingaustralia.gov.au.
• First Home Super Saver (FHSS): Lets eligible first home buyers withdraw voluntary super contributions (max $15,000 per year, $50,000 lifetime, plus deemed earnings) toward a deposit. It's a tax-effective way to get to a bigger deposit faster. See the ATO.

Worked example: $600k loan, 10% vs 20% deposit

Say you're buying a $750,000 home and can either buy now with a 10% deposit ($75,000) or keep saving toward 20% ($150,000).

	Buy now (10% deposit)	Save to 20% deposit
Deposit	$75,000	$150,000
Loan	~$675,000 (90% LVR)	$600,000 (80% LVR)
LMI estimate	~$12,000 (≈1.79% of loan)	$0
Repayment @ 6% / 30yr	higher (bigger loan)	~$3,597/mo

For the cleaner $600,000-loan case True Loan uses: at 90% LVR an LMI estimate is roughly 1.79% of the loan ≈ $10,740; at 80% LVR it's $0. A standard $600,000 loan at 6% over 30 years is about $3,597/month. The "cost of buying now" is the LMI premium. The "cost of waiting" is the extra deposit you must save plus any price growth while you save. If that $750k home grows 5% in the year it takes to save the extra $75k, the price rises ~$37,500, which can dwarf the LMI you'd have paid.

The maths is checkable: deposit + LMI + stamp duty and fees = your funds at settlement, and the loan amount drives the repayment.

Model this in True Loan

Open True Loan and build both versions, then compare them side by side:

1. Scenario A — buy now: set the property value, a 10% deposit, and let the LMI estimate populate. Choose whether to pay it upfront or capitalise it. Note the total funds at settlement and the repayment.
2. Scenario B — save to 20%: same property value, 20% deposit. LMI shows $0. Set the property growth rate to see how much the price (and your target deposit) could move while you save.
3. Use the timeline to compare remaining debt, equity and LVR over time. If you'd direct savings into the loan instead, use the dedicated Extra repayment ($/month) input; if you'd park a lump sum against the loan, use the separate Offset balance input. They're modelled independently.

Share either scenario by copying its URL.

Common questions and mistakes

Does LMI protect me? No, it protects the lender. You pay it; they're insured.

Is capitalising LMI "free"? No. You borrow it, so you pay interest on it across the loan term. See pay LMI upfront or capitalise.

Can I just use the First Home Guarantee and skip both? If you're eligible and under the price cap, FHG removes LMI at a 5% deposit, though you still need to service a larger loan. Model the higher repayment.

I forgot stamp duty. Your deposit isn't your only upfront cost. Always add stamp duty plus fees; in some states first home buyers get concessions or exemptions.

Bigger deposit = smaller loan = less interest. True, but weigh that against time out of the market and the opportunity cost of holding cash.

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Figures here are estimates for the 2025-26 financial year and vary by lender, insurer and state. This is general information, not financial or credit advice. Check official sources (your state revenue office, moneysmart.gov.au, the ATO and Housing Australia) and consider your own circumstances.