Twenty percent is the number everyone quotes. It is worth understanding where it came from, because for many buyers it is no longer the number that matters most.

Why 20%

At a loan-to-value ratio of 80% or below, lenders do not require Lenders Mortgage Insurance. That is the entire reason for the figure. It is a threshold in the lender's risk model, not a measure of readiness.

What LMI actually is, and costs

LMI insures the lender against your default. It does not protect you. You pay the premium, usually capitalised into the loan, which means you also pay interest on it for thirty years.

It scales sharply with your LVR. Indicatively, on a 90% LVR loan the premium sits in the region of two to two and a half percent of the loan, and at 95% it can approach four to five percent. On a $700,000 loan at 95% LVR that is a premium in the region of $30,000, added to your debt.

Actual premiums vary by insurer, lender, loan size and borrower profile. Two lenders can quote materially different figures for the same borrower, which is one reason a broker is useful.

The trade-off, honestly

Saving from 5% to 20% in a rising market can cost more in price growth than the LMI you avoided. Paying LMI to buy earlier is sometimes the better financial decision and sometimes not. Anyone who tells you it is always one or the other is not doing the arithmetic on your specific numbers.

The schemes that change the maths entirely

Two federal schemes can remove the LMI question or reduce the deposit dramatically. They are covered properly in The Government Schemes, Explained, but in short:

  • The 5% Deposit Scheme. First home buyers with a 5% deposit, or single parents and legal guardians with 2%, can buy without paying LMI. It was formerly called the Home Guarantee Scheme. Property price caps apply by location.
  • Help to Buy. 2% deposit with the government taking an equity share, cutting the loan itself. Open to Australian citizens only.

The costs that are not the deposit

Budget these separately, because they are due in cash at settlement and they catch people out.

  • Stamp duty. The largest one, varying enormously by state and by whether you qualify for a first home buyer concession. Several states exempt first home buyers entirely below a threshold. Use your state revenue office calculator rather than an estimate.
  • Conveyancing or solicitor fees, typically in the low thousands.
  • Building and pest inspection, a few hundred dollars, and never the place to economise.
  • Loan application, valuation and registration fees.
  • Moving, connections and insurance from settlement day.

Save the deposit inside super

The First Home Super Saver Scheme lets you make voluntary contributions to super, taxed at 15% rather than your marginal rate, and later withdraw up to $50,000 plus associated earnings toward a first home deposit. Annual contribution caps apply, so the total takes several years to build. If a purchase is more than two years away, this is worth understanding now rather than later.