Wait for a 20% Deposit or Pay LMI? How to Decide

Short answer: It depends on how much lenders mortgage insurance (LMI) would actually cost you compared with what waiting would cost in rent and in a rising property price. The only way to know is to get a real LMI quote and check whether a government scheme could remove LMI altogether.

This is general information only and not financial advice. Lender and scheme rules change, so confirm the details with your lender or a licensed broker.

What LMI actually is

Moneysmart describes LMI as a safeguard for lenders: it covers the lender if a borrower cannot repay, it is typically a single upfront charge, and it applies when you borrow more than 80% of the property’s value. Moneysmart also states that LMI does not benefit the borrower, it only protects the lender (Moneysmart, LMI glossary). So you pay for it, but the protection is not yours.

The premium depends on the lender’s insurer, your loan to value ratio (LVR), the loan size and sometimes your circumstances. Policies and pricing differ between lenders, so I will not quote a typical figure. Ask for the actual dollar amount.

Why 20% became the magic number

Moneysmart suggests saving about 20% of the purchase price plus enough for buying costs, because a 20% deposit avoids LMI (Moneysmart, buying a house). That is a reasonable target. But it is a target, not a rule, and for some buyers the cost of reaching it is larger than the cost of the insurance it avoids.

Government options that can change the maths

Moneysmart lists several low-deposit options: the 5% deposit scheme for eligible first home buyers, Help to Buy (minimum 2% deposit, with the government contributing a share you repay later), and state-based low-deposit loans in some states. It says certain government programs may help you avoid LMI, and that First Home Owner Grants and stamp duty concessions vary by state and territory (Moneysmart, ways to buy a home sooner).

The First Home Guarantee is the one I see raised most. Housing Australia says that from 1 October 2025 the limits on the number of guarantees were removed, income caps were removed, and price caps were raised in many areas. For example, the NSW capital city and regional centre cap rose from $900,000 to $1,500,000. Eligible buyers with a 5% deposit can avoid LMI (Housing Australia, October 2025 changes).

Other conditions still apply. Housing Australia’s FAQs say you must be an owner-occupier buying a new or existing residential property, you apply through a participating lender who assesses eligibility, price caps vary by location, and the property value as assessed by the lender must also be within the cap (Housing Australia, First Home Guarantee FAQs). That page also lists other eligibility criteria, so check it and your lender before relying on the scheme.

Illustrative example: waiting versus buying now

These are my own figures to show how to run the comparison, not a forecast. Assume a $600,000 purchase.

• 20% deposit = $120,000. A 12% deposit = $72,000, so the loan would be $528,000 (88% LVR).
• Assume, purely for illustration, prices rise 5% over the two years you wait: $600,000 x 1.05 = $630,000. The price is $30,000 higher and a 20% deposit is now $126,000, which is $6,000 more to save.
• Buying now at 88% LVR means borrowing $528,000 instead of $480,000 (80% LVR), which is $48,000 extra. At an illustrative 6% interest rate that is about $2,880 of interest in the first year ($48,000 x 0.06).

To compare, add up: the LMI quote, plus the extra interest on the larger loan, against the rent you would pay while waiting and any price rise. If prices stay flat or fall, waiting looks better. If they rise faster than you save, buying sooner can win. Nobody can know which, so test both outcomes. A 5% deposit under the First Home Guarantee changes the sum again: on this example it is $30,000, with no LMI if you are eligible.

What else lenders look at

A smaller deposit still has to pass serviceability. Lenders test repayments at least 3 percentage points above the loan rate; APRA has confirmed that buffer remains at 3 percentage points (APRA, November 2024). A higher LVR also means a bigger loan, so check your borrowing capacity before assuming you can buy early. Moneysmart recommends checking that you could still afford repayments if rates rose by 2% (Moneysmart).

What to do next

• Ask two or three lenders for a written LMI estimate at your actual deposit and loan size.
• Check First Home Guarantee eligibility and your target postcode’s price cap with a participating lender.
• Look up your state’s first home owner grant and stamp duty concessions.
• Run the waiting-versus-buying maths with your own rent, rates and a flat-price scenario as well as a rising one.
• Test your repayments at 3 points above the loan rate before you commit.

Related Reading

• Lending Glossary
• How an RBA rate move changes your repayments
• Should You Refinance? The Simple Maths That Actually Answers It

Written by Michael Wignall, who’s spent 30+ years in banking and home lending across the ACT, Illawarra, and Riverina regions of NSW.

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Written by Michael Wignall, Lending Area Manager with 30+ years in banking and home lending across the ACT, Illawarra, and Riverina. Got a question or an idea for a post? Get in touch.