Pay LMI Upfront or Capitalise It Into Your Loan?
Published 31 May 2026
The short answer
If you have the cash to spare at settlement, paying Lenders Mortgage Insurance (LMI) upfront keeps your loan smaller and avoids paying interest on the premium for up to 30 years. Capitalising it (adding it to the loan) preserves your cash buffer but means you pay interest on the premium over the life of the loan, often more than the premium itself. Neither is universally "better". It depends on whether you'd rather protect cash now or minimise total interest, and on how long you'll keep the loan.
How it works in Australia
LMI is a one-off insurance premium that protects the lender (not you) when you borrow with a deposit under 20%, that is, at a loan-to-value ratio (LVR) above 80%. It is zero at an LVR of 80% or below and rises steeply as LVR climbs, because the premium is a percentage of the loan amount that increases by LVR band. See how LMI is calculated by LVR bands for the structure.
Most lenders let you do one of two things with the premium:
- Pay it upfront. You fund the premium from savings at settlement, alongside your deposit, stamp duty and other costs. Your loan amount is unchanged.
- Capitalise it. The premium is added to your loan balance. You borrow more, so your repayments and total interest rise, and your starting LVR is slightly higher.
A key point many buyers miss: capitalising LMI increases the loan, which can nudge you into a higher LVR band or even above a lender's maximum LVR cap. The premium itself is generally not refundable if you later refinance or sell, whichever way you pay it.
The premium may be avoidable entirely. First home buyers who qualify for the First Home Guarantee can buy with as little as a 5% deposit and pay no LMI, because the Commonwealth guarantees the rest. From 1 October 2025 the scheme has no place limits and no income caps, with price caps up to $1.5m in Sydney, $950k in Melbourne and $1m in Brisbane (Housing Australia).
Worked example: a $600,000 loan at 90% LVR
Say you're buying a $666,667 home with a 10% deposit, borrowing $600,000 at a 6% variable rate over 30 years. At 90% LVR, LMI is roughly 1.79% of the loan ≈ $10,740 (Moneysmart explains LMI).
| Pay LMI upfront | Capitalise LMI | |
|---|---|---|
| Loan amount | $600,000 | $610,740 |
| Cash needed at settlement | +$10,740 | $0 extra |
| Monthly repayment (P&I) | ~$3,597 | ~$3,661 |
| Extra repayment vs upfront | — | ~$64/month |
| Extra interest over 30 years | — | ~$12,400 |
The maths: a $600,000 loan at 6% over 30 years repays about $3,597/month. Capitalising the $10,740 premium lifts the loan to $610,740 and the repayment to about $3,661/month, roughly $64 more each month. Over 360 months that's about $23,100 repaid on the capitalised premium, of which ~$10,740 is the premium and ~$12,400 is interest. So capitalising costs you the premium plus roughly its value again in interest if you keep the loan the full term. Sell or refinance in, say, 5 years and you'll have paid far less of that interest, which is why capitalising hurts less over short holding periods.
Model this in True Loan
You can compare both paths in True Loan in a couple of minutes, free and with no login:
- Enter the property price, your deposit, rate (6%) and term (30 years). The upfront-costs panel shows the LMI estimate based on your LVR band.
- There's a toggle to capitalise LMI. Turn it off to see the loan, repayment and total interest with LMI paid upfront; turn it on to add it to the loan and watch the repayment and total interest rise.
- Use the side-by-side comparison to keep both versions open at once ("upfront" vs "capitalised") and read the difference in total cost directly.
- To see how quickly you'd erase the capitalised premium, add an Extra repayment ($/month) of, say, $64 in the capitalised scenario. That offsets the higher repayment and shortens the term.
If you're weighing whether to chase a bigger deposit instead, see how much deposit to avoid LMI.
Common questions and mistakes
Does capitalising LMI change my repayment? Yes. A larger loan means a higher repayment (about $64/month more in the example above) and more total interest.
Can capitalising push me over the lender's LVR limit? It can. Because the premium is added to the loan, your LVR rises; some lenders cap the total (loan + capitalised LMI) at 95% or 97%.
Is LMI the same as the First Home Guarantee? No. The guarantee avoids LMI for eligible first home buyers; it isn't a cheaper LMI.
Will I get the premium back if I refinance? Generally no. LMI is a one-off, largely non-refundable premium regardless of how you pay it.
Common mistake: assuming "capitalise" is free because there's no cash outlay. You still pay the premium, plus interest on it for as long as you hold the loan.
Figures here are estimates for the 2025–26 financial year and depend on your lender, LVR and rate. Check official sources (Moneysmart, your state revenue office and Housing Australia) and confirm with your lender. This is general information, not financial or credit advice.
This guide is general information and estimates only — not financial or credit advice. Figures vary by lender and circumstances; always confirm with official sources.