In short: LVR (loan-to-value ratio) is your loan divided by the lender's valuation of the property, expressed as a percentage. Above 80% LVR most lenders charge lenders mortgage insurance (LMI), a one-off premium that protects the lender, not you. Indicatively, LMI costs about 1% of the loan at 85% LVR, 2% at 90% and 4–4.5% at 95%, and can be avoided through the First Home Guarantee or a guarantor.
Two acronyms decide more about the cost of your first home loan than the interest rate does. LVR sets the tier you fall into for pricing and policy; LMI is the bill you get for being in a high tier. Understanding both lets you decide whether to save a bit longer, use a government scheme, or pay the premium and buy now. This guide gives you the calculations, the price points, and the strategies Melbourne buyers use to keep LMI off the table.
How LVR is calculated
LVR is simply the loan amount divided by the property value, times 100. The catch is which value. Lenders use the lower of the contract price and their own valuation, so a low valuation pushes your LVR up.
| Purchase price | Deposit | Loan | LVR |
|---|---|---|---|
| $650,000 | $130,000 (20%) | $520,000 | 80% |
| $650,000 | $65,000 (10%) | $585,000 | 90% |
| $650,000 | $32,500 (5%) | $617,500 | 95% |
| $500,000 | $50,000 (10%) | $450,000 | 90% |
| $800,000 | $80,000 (10%) | $720,000 | 90% |
If you pay $650,000 for a house in Craigieburn but the valuer says $630,000, a $585,000 loan is now 92.9% LVR. You either find the extra cash to bring the loan down, or you pay a higher LMI premium, or the lender declines. Check any scenario with the LVR calculator.
Purchase costs (stamp duty, conveyancing, inspections) are paid from your savings and are not part of the LVR, which is why a "10% deposit" usually needs closer to 13–15% in the bank for an established home in Victoria if you are not a first home buyer.
Why 80% is the line
Lenders price risk by LVR tier. Below 80% the lender's exposure is modest even if prices fall and the borrower defaults. Above 80% the lender insures its exposure with an LMI provider and passes the premium on to you. The tiers also affect interest rate, policy and how the application is assessed.
| LVR tier | Typical treatment |
|---|---|
| Up to 60% | Sharpest rates, most flexible policy |
| 60.01–80% | Standard rates, no LMI |
| 80.01–85% | LMI applies (small premium), slightly higher rates with some lenders |
| 85.01–90% | LMI applies, stricter credit checks, genuine savings usually required |
| 90.01–95% | LMI applies (large premium), fewer lenders, tightest policy |
| Above 95% | Generally only with a guarantor or LMI capitalised on top of a 95% loan |
What LMI actually is
Lenders mortgage insurance is a policy the lender takes out with an insurer to cover its loss if you default and the sale of the property does not clear the debt. Three things to understand:
- It protects the lender, not you. If you default, the insurer pays the lender, then can pursue you for the shortfall.
- It is a one-off premium. You pay it once at settlement, either from savings or by adding it to the loan. There are no ongoing LMI payments.
- It is not portable. If you refinance to another lender while still above 80% LVR, you pay LMI again.
Some insurers offer a partial refund if the loan is repaid or refinanced within the first one or two years, but do not count on it. The government's consumer site Moneysmart has a plain-English overview if you want an independent source.
What LMI costs
Premiums vary by insurer, lender, loan size, LVR and whether you are a first home buyer, so treat these as indicative and run your own figures through the LMI calculator.
| Purchase price | Deposit | Loan | LVR | Indicative LMI |
|---|---|---|---|---|
| $500,000 | $75,000 | $425,000 | 85% | approx. $4,300 |
| $500,000 | $50,000 | $450,000 | 90% | approx. $9,000 |
| $500,000 | $25,000 | $475,000 | 95% | approx. $20,000 |
| $650,000 | $97,500 | $552,500 | 85% | approx. $5,500 |
| $650,000 | $65,000 | $585,000 | 90% | approx. $11,700 |
| $650,000 | $32,500 | $617,500 | 95% | approx. $26,000 |
| $800,000 | $80,000 | $720,000 | 90% | approx. $14,400 |
| $800,000 | $40,000 | $760,000 | 95% | approx. $33,000 |
Note how steeply the premium climbs between 90% and 95%. On a $650,000 purchase, the extra $32,500 of deposit needed to get from 95% to 90% LVR saves roughly $14,000 in LMI. On some loans the premium can also be subject to stamp duty on insurance, which adds a little more.
Capitalising LMI into the loan
Most buyers add the premium to the loan rather than paying cash. That preserves your deposit but means you pay interest on the premium for the life of the loan. For illustration, capitalising $26,000 of LMI onto a $617,500 loan at 6.00% p.a. over 30 years adds about $156 a month and roughly $30,000 in interest over the full term if never paid down early. Some lenders allow the capitalised loan to exceed 95% LVR (for example 97%); others require the total to stay within the cap.
Worked example: two ways to buy in Wollert
Nisha has $70,000 saved and is looking at a $650,000 established townhouse in Wollert. She is a first home buyer, so stamp duty is roughly $11,357 rather than $34,070, and she budgets $4,000 for conveyancing and inspections.
Option A: 90% LVR with LMI
| Item | Amount |
|---|---|
| Deposit (10%) | $65,000 |
| Costs from savings | $15,357 (duty + conveyancing) |
| Shortfall in savings | about $10,000, so she borrows a little more or waits |
| LMI (capitalised) | approx. $11,700 |
| Loan | about $596,700 |
| Repayment (for illustration, at 6.00% p.a., 30 years) | approx. $3,577/month |
Option B: First Home Guarantee at 95% LVR
| Item | Amount |
|---|---|
| Deposit (5%) | $32,500 |
| Costs from savings | $15,357 |
| Savings left over | about $22,000 buffer |
| LMI | nil |
| Loan | $617,500 |
| Repayment (for illustration, at 6.00% p.a., 30 years) | approx. $3,703/month |
Option B costs about $126 more per month, but Nisha keeps a $22,000 buffer, avoids $11,700 of LMI, and does not need to stretch. Provided she meets the First Home Guarantee criteria and the townhouse is under the $950,000 Melbourne cap, it is the stronger choice. If she were not eligible, Option A is the realistic path and the LMI is the price of buying two years earlier.
Ways to avoid or reduce LMI
- Save to 20%. The obvious route, but in a rising market the premium can be cheaper than the price growth you miss. Use the deposit savings calculator to compare timelines.
- First Home Guarantee. 5% deposit, no LMI, no income cap, unlimited places, price cap $950,000 in Melbourne and Geelong. The single biggest LMI saver available.
- Help to Buy. The government's equity share drops your loan well below 80% LVR. See the Help to Buy guide.
- A family guarantor. A parent's property secures part of your loan, taking your effective LVR below 80%. Read buying with a guarantor and the guarantor legal responsibilities page.
- Professional LMI waivers. Some lenders waive LMI up to 90% LVR for doctors, dentists, lawyers, accountants and certain other professions.
- Lender-paid LMI. A few lenders absorb the premium in exchange for a higher rate on 85% loans. Compare total cost over the years you expect to hold the loan.
- Buy cheaper. A $550,000 house in Kalkallo or Mickleham with the same deposit might sit under 80% LVR where a $650,000 home would not.
Whichever route you pick, the low deposit home loans service page lists the options GNT Finance works with.
Getting your LVR down after you buy
LMI is paid once, but LVR keeps mattering. Once your loan is below 80% of the property's current value you can refinance to a sharper rate without a new premium, and you may be able to release equity for an investment property. That happens through a combination of repayments and price growth. On the Wollert example, if the townhouse grows to $740,000 and the loan drops to $590,000 after five years, the LVR is 79.7%. Track it with the equity calculator and read when to refinance for timing.
Common mistakes
- Assuming LMI protects you. It does not. Consider income protection or mortgage protection insurance separately if you want cover.
- Ignoring valuation risk. Paying above market at auction can push a 90% loan to 93% and double the premium.
- Refinancing while still above 80%. You pay LMI again. Wait until the LVR is under 80% unless the savings clearly outweigh a second premium.
- Counting purchase costs as deposit. The LVR test is on the loan versus value only; duty and fees come on top of the deposit.
- Not asking about waivers. Essential-service and professional waivers are not advertised. Ask.
- Choosing 95% LVR without a buffer. With no savings left after settlement, one unexpected repair puts the loan under stress. See mortgage stress: what to do.
Frequently asked questions
Is LMI a one-off cost?
Yes. Lenders mortgage insurance is a single premium paid at settlement, either from your savings or by adding it to your loan. There are no monthly LMI payments. If you capitalise it, you pay interest on the premium as part of your normal repayments. You may have to pay a new premium if you refinance to another lender while still above 80% LVR.
Can I add LMI to my loan?
Most lenders let you capitalise LMI onto the loan so you do not need cash for it at settlement. Some allow the total loan to go slightly above their LVR cap to accommodate it, for example 97% on a 95% loan; others require the total including LMI to stay within the cap. Capitalising costs more over time because interest accrues on the premium.
Is LMI refundable?
Partially, in limited cases. Some insurers refund a portion of the premium if the loan is repaid or refinanced within the first year or two. After that there is no refund, and LMI is never transferred to a new lender. Treat any refund as a bonus rather than a plan, and ask your broker which insurer your lender uses before settlement.
What LVR do I need to avoid LMI?
80% or lower with almost every lender, which means a 20% deposit plus purchase costs. Exceptions include the First Home Guarantee (95% LVR with no LMI), a family guarantor (effective LVR under 80%), professional waivers up to 90% for eligible occupations, and a handful of lender-paid LMI products at 85%.
Does LMI cost more for first home buyers?
No. Premiums are based on loan size, LVR and the insurer's risk rating, not on whether it is your first home. Some insurers actually price owner-occupier loans slightly cheaper than investment loans at the same LVR. First home buyers are, however, the group most likely to qualify for the First Home Guarantee, which removes LMI altogether.
What happens to LMI if I sell the house?
Nothing. The premium was a one-off payment for the lender's insurance on that loan, and it is not refunded when you sell or pay the loan out (beyond any early-repayment refund in the first year or two). If you buy again above 80% LVR you will pay a new premium on the new loan.
Talk to GNT Finance
Whether you pay LMI, avoid it through the First Home Guarantee, or bring in a guarantor is a decision worth thousands of dollars, and it depends on your deposit, your timeline and which lenders are open to your profile. GNT Finance compares those paths for buyers across Melbourne's north and the wider city, at no cost to you for our home-loan service in most cases. Book a free consultation or call Gorakh Timilsina on 0426 403 703.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.