Two insurance products with “mortgage” in the name cause confusion for almost every home buyer in Australia. Lenders Mortgage Insurance (LMI) and Mortgage Protection Insurance (MPI) sound related — but they serve completely different purposes and protect completely different parties.
Here’s exactly what each one does, and how to think about them for your own situation.
Lenders Mortgage Insurance (LMI)
What It Is
LMI is an insurance policy that protects the lender — not you — if you default on your home loan and the sale of the property doesn’t cover the outstanding debt.
If you borrow more than 80% of a property’s value (i.e., your deposit is less than 20%), most lenders require you to pay for LMI. You pay the premium, but the insurer’s client is the bank.
How It Works
Say you buy a property for $750,000 with a 10% deposit ($75,000). You borrow $675,000 — an LVR of 90%. If you later default, the bank sells the property in a distressed market for $620,000. After selling costs, they recover $595,000 — leaving a $80,000 shortfall.
LMI covers that shortfall for the lender. But here’s the critical point: the LMI insurer can pursue you for the shortfall amount even after they’ve paid the bank. LMI is not a personal protection product.
What LMI Costs
LMI premiums are calculated as a percentage of the loan amount (not the property value). The percentage increases with LVR:
| LVR | Approximate LMI Premium (on $600,000 loan) |
|---|---|
| 85–90% | $8,000–$14,000 |
| 90–95% | $16,000–$24,000 |
These are rough estimates — actual premiums depend on the LMI provider (Helia or QBE in Australia), the lender, loan type, and property location. The premium is typically capitalised onto the loan (added to the balance), so you also pay interest on it.
Can You Avoid LMI?
Yes, several ways:
Save a 20% deposit. The straightforward path — borrow at 80% LVR or below and LMI doesn’t apply.
Use the First Home Guarantee (FHBG). The federal government’s scheme allows eligible first home buyers to purchase with as little as a 5% deposit without paying LMI, because the government guarantees up to 15% of the loan. Places are limited each financial year.
Use a guarantor. A family member can use equity in their own property as security. This allows you to borrow at a higher effective LVR without LMI, because the guarantor’s equity reduces the lender’s exposure below 80%.
Use a lender that self-insures. A small number of lenders (typically credit unions or mutual banks) hold their own LMI, which can be structured differently or at lower cost.
Profession exemptions. Some lenders waive LMI for certain professions — medical professionals, lawyers, and accountants are the most common — as these borrowers are considered lower risk due to stable, high income. Check with your broker.
Mortgage Protection Insurance (MPI)
What It Is
Mortgage Protection Insurance (also called home loan protection insurance or mortgage repayment insurance) is a policy that protects you by covering your home loan repayments if you’re unable to work — due to injury, illness, involuntary redundancy, or death.
Unlike LMI, MPI is a voluntary insurance product. No lender requires it. But for many borrowers, it’s a genuinely useful financial safety net.
What It Typically Covers
Cover varies between providers, but most MPI policies include:
- Death — pays out the outstanding loan balance (or a fixed benefit) to your estate
- Total and Permanent Disability (TPD) — lump sum to repay the mortgage if you can never work again
- Temporary disability / injury — monthly repayment benefit (typically 12–24 months) if you can’t work temporarily
- Involuntary unemployment — some policies cover a period of repayments if you’re made redundant (usually limited to 3–6 months)
What It Doesn’t Cover
- Voluntary resignation or self-employment income loss (varies by policy)
- Pre-existing conditions known at application
- Claims within the first 30–90 days of the policy (exclusion period)
MPI vs. Separate Life + Income Protection
MPI is a convenient bundled product, but for most borrowers it’s not the most cost-effective way to manage mortgage risk. A more comprehensive approach is to hold:
- Life insurance — for death and terminal illness; premiums generally lower than MPI for equivalent benefit
- Income protection insurance — covers up to 70% of your total income (not just mortgage repayments), for a defined benefit period up to age 65
- TPD insurance — covers permanent disability
The advantage of this approach: income protection pays you a benefit you control and can use for any purpose (mortgage, living expenses, business costs), rather than a narrowly defined mortgage repayment benefit.
The disadvantage: you need to manage three separate policies, and the total premium can be higher depending on your age, health, and occupation.
For self-employed borrowers, income protection is generally the more important product — see our guide to income protection for self-employed Australians for details.
Cost of MPI
MPI premiums are typically structured as a monthly payment linked to the loan balance. A rough guide for a 35-year-old non-smoker with a $600,000 loan:
- Basic death and TPD cover: $30–$60/month
- Adding income/disability cover: $80–$150/month
Premiums reduce as the loan balance falls (for decreasing cover policies) or remain flat (for level benefit policies).
Side-by-Side Summary
| LMI | MPI | |
|---|---|---|
| Who does it protect? | The lender | You (the borrower) |
| Is it compulsory? | Yes, for LVR > 80% (usually) | No — voluntary |
| Who pays the premium? | You | You |
| What does it pay for? | Lender’s loss on default | Your repayments if you can’t work |
| Can you choose to buy it? | No (if required by lender) | Yes |
| Is the premium tax deductible? | No (for owner-occupiers) | Partially (IP component may be) |
The Bottom Line
If your lender is charging you LMI, understand that you’re paying for their protection — not yours. That’s not unreasonable (the bank is taking on additional risk by lending you more than 80%), but don’t confuse it with personal protection.
Whether you also need MPI — or better yet, a proper income protection and life insurance structure — depends on your income stability, dependants, reserves, and existing cover through super.
If you’re carrying a large mortgage and your ability to service it depends on your continued income, a proper review of your personal insurance with a financial adviser is worth the time.
General information only. Not financial or insurance advice. Insurance products have specific terms, conditions and exclusions. Read the Product Disclosure Statement before purchasing.