For many first-home buyers, the biggest challenge to homeownership is saving for a deposit. Traditionally, buyers aim to save 20% of the property price to avoid Lenders Mortgage Insurance (LMI). But is this always the best approach?
With rising property prices and rental costs, waiting to save a 20% deposit may actually cost more in the long run. On the other hand, paying LMI allows buyers to enter the market sooner, benefiting from potential capital growth.
In this article, we will compare paying LMI vs. waiting to save a 20% deposit, looking at the numbers, financial impact, and which option may be the smarter choice for first-home buyers.
1. Understanding Lenders Mortgage Insurance (LMI)
What is LMI? Lenders Mortgage Insurance (LMI) is a one-time fee that protects the lender (not the borrower) when a homebuyer has less than a 20% deposit. It allows buyers to purchase a home with as little as 5-10% deposit, removing the need to wait years to save more.
How Much Does LMI Cost? LMI costs vary based on the loan amount and deposit percentage. Here’s an estimate of LMI costs for a $600,000 property:
| Deposit % | Deposit Amount | Loan Amount | Estimated LMI Cost |
|---|---|---|---|
| 20% | $120,000 | $480,000 | $0 |
| 10% | $60,000 | $540,000 | ~$12,000 - $15,000 |
| 5% | $30,000 | $570,000 | ~$18,000 - $25,000 |
Key Takeaway: Paying LMI allows buyers to purchase a home with a smaller deposit, but it comes at an additional cost.
2. The Cost of Waiting for a 20% Deposit
Many first-home buyers think that waiting and saving is the smarter financial move. However, during this waiting period, several factors work against buyers:
Property prices increase – The market doesn’t wait while you save.
You keep paying rent – Instead of paying towards your mortgage, your money goes to a landlord.
Loan affordability changes – Interest rates and lending policies may shift, making loans harder to secure.
Example: Buying Now vs. Waiting for a 20% Deposit
Let’s assume a 3% annual property price growth and an average rental cost of $2,200/month ($26,400/year).
| Scenario | Buy Now with LMI | Wait & Save 20% |
|---|---|---|
| Property Price Today | $600,000 | $600,000 |
| Deposit Available Today | $30,000 (5%) | $30,000 (5%) |
| Required Deposit | $30,000 | $120,000 |
| Years to Save Extra $90,000 | 0 years | 4-5 years |
| Property Price in 5 Years | ~$700,000 | ~$700,000 |
| New 20% Deposit Required | N/A | $140,000 |
| Total Rent Paid in 5 Years | N/A | $132,000 |
| Total Cost Difference | Pays ~$20,000 LMI but gains $100,000 in equity | Saves LMI but loses $100,000 in capital growth & pays rent apart from the principal reduction in loan |
Key Takeaway: The buyer who paid LMI and bought early is in a better financial position than the one who waited to save a 20% deposit.
3. The Opportunity Cost of Waiting
Missed capital growth: If property prices rise by even 3-5% per year, waiting means needing an even larger deposit in the future.
Paying rent instead of a mortgage: Every year spent renting is a year not spent building home equity.
Changing interest rates: If interest rates increase, buyers might end up with higher repayments even after saving a 20% deposit.
Key Takeaway: The longer you wait, the more you lose in potential home equity and wealth-building opportunities.
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4. When Does Waiting for a 20% Deposit Make Sense?
While paying LMI is often the better financial choice, there are situations where waiting makes sense:
If property prices are declining and waiting may lead to a better deal.
If the borrower has unstable income or poor credit, making loan approval difficult.
If the borrower qualifies for government schemes that waive LMI (e.g., First Home Guarantee Scheme).
Key Takeaway: If waiting allows you to access a better loan or avoid financial risk, it may be the right choice.
5. Final Verdict: LMI or 20% Deposit?
Choose LMI & Buy Now If:
- You want to enter the property market sooner.
- You expect property prices to rise.
- You are paying high rent and want to start building home equity.
- You can afford the LMI cost within your loan structure.
Wait for a 20% Deposit If:
- You have unstable income or bad credit.
- You qualify for LMI waivers or government schemes.
- Property prices are declining, making it smarter to wait.
Bottom Line: In most cases, buying with LMI is the smarter financial move because it allows buyers to build equity sooner and avoid rising property prices. However, the decision should be based on market conditions, personal finances, and loan eligibility.
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Frequently Asked Questions
Lenders Mortgage Insurance (LMI) is a one-time fee that protects the lender if a borrower defaults on their mortgage. It is required when a homebuyer has less than a 20% deposit. While it doesn’t protect the borrower, it allows buyers to purchase a home with a smaller deposit and enter the market sooner.
The cost of LMI varies based on loan amount, deposit size, and lender policies. On average, LMI costs 1-5% of the loan amount. For example:
- $600,000 home with 10% deposit → LMI cost ~$12,000 – $15,000
- $600,000 home with 5% deposit → LMI cost ~$18,000 – $25,000
Most lenders allow LMI to be added to the loan, so you don’t have to pay it upfront.
A 20% deposit reduces risk for the lender because it lowers the Loan-to-Value Ratio (LVR). Loans with less than 20% deposit are considered higher risk, which is why LMI is required as protection for the lender.
✔ Buy sooner instead of waiting 4-5 years to save more
✔ Start building equity immediately instead of paying rent
✔ Avoid rising property prices, which could make saving 20% even harder
✔ Lock in a good interest rate now before rates increase
Waiting longer may cost more than simply paying LMI and purchasing earlier.
Let’s say you’re renting for $2,200 per month ($26,400 per year) while saving for a 20% deposit.
- Over 5 years, you’ll have spent $132,000 on rent.
- If property prices grow at 3% annually, the home you wanted for $600,000 today could cost upto $700,000+ in 5 years.
- Meanwhile, someone who bought with LMI has already gained equity in their home.
Key Takeaway: The cost of waiting (rent + property price growth) is often greater than the one-time LMI fee.
Yes! Some buyers can avoid LMI through:
✔ First Home Guarantee (FHG) – Allows eligible first-home buyers to buy with just 5% deposit without LMI.
✔ Profession-Specific LMI Waivers – Doctors, accountants, lawyers, and engineers may qualify for LMI-free loans.
✔ Family Pledge Loans (Guarantor Loans) – A family member uses their home equity to secure your loan, eliminating LMI.
It depends on your situation.
Pay LMI if:
- You want to buy sooner instead of waiting years.
- You expect property prices to rise.
- You are paying high rent and want to build equity instead.
- You qualify for a competitive loan with LMI added.
Wait for 20% deposit if:
- Your income is unstable, and saving a larger deposit is safer.
- You qualify for an LMI waiver or government scheme.
Property prices are declining, and waiting may get you a better deal.
Not always! In many cases, LMI-backed loans come with competitive interest rates because they are considered lower risk (due to lender protection). However, if you have a very low deposit (e.g., 5%), some lenders may charge slightly higher rates.
Some lenders offer partial LMI refunds if you refinance or pay off your loan within the first 2 years. However, most LMI payments are non-refundable, so check with your lender.
Yes! Most lenders allow LMI to be capitalized into your loan, meaning you don’t have to pay it upfront. Instead, it is added to your total loan balance and included in your monthly repayments.
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Buying now could mean gaining equity and avoiding rising costs.
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