Lenders Mortgage Insurance (LMI) is the extra cost of borrowing more than 80% of a property’s value. Some investors wait years to save a 20% deposit so they can avoid it. Others pay it and buy sooner, sometimes using the same savings to buy two properties instead of one. Neither approach is automatically right. We break down the numbers for both, including the holding costs and downside risks that most LMI comparisons leave out.
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LMI is a one-off premium charged when your loan is more than 80% of the property’s value. It protects the lender, not you, if you default.
On a $500,000 property with a 10% deposit, LMI is commonly in the range of $7,000 to $10,000. The exact cost depends on the lender and the loan size, so ask a broker for a quote.
There are two ways to pay it:
For an investment loan, LMI may be claimable over several years as a borrowing cost, so ask your accountant. First home buyers purchasing a home to live in may be able to avoid LMI through the 5% Deposit Scheme, but that scheme does not apply to investment purchases.
Take a $500,000 property and compare two ways of using roughly the same savings.
Strategy B is not the same amount of money. It needs about $52,000 more cash, because each property carries its own upfront costs and LMI. The $35,000 figure covers stamp duty, legal costs, inspections, and a buyers agent fee (stamp duty also varies by state).
Assume both strategies are held for 10 years on interest-only loans, so the debt stays the same. The table shows the rise in property value, and how much of it you gain per dollar of cash invested.
At 5% growth, Strategy A gains about $314,000 on $135,000 invested, or $2.33 per dollar. Strategy B gains about $629,000 on $187,000, or $3.36 per dollar. In this scenario the second property does more than enough work to cover the LMI, because you control twice the value with a similar pool of savings.
Three things to keep in mind when you read this table:
The table also shows the other side. At 0% growth, neither strategy gains anything and Strategy B has spent $52,000 more to get there. At 2%, gains are small relative to the cash invested.
Growth is only half the picture. Here is the first-year interest bill on interest-only loans at 6.5%, with each property renting for $400 a week. These are illustrative figures.
Strategy B’s shortfall is before council rates, insurance, management fees, and maintenance. It is also real cash, because for established properties bought after 12 May 2026, losses carry forward against future property income instead of offsetting your wages. New builds keep full negative gearing.
Borrowing capacity
Lenders assess you at a rate 3 percentage points above your actual loan rate. At 6.5%, that means being assessed at 9.5%, where interest on $900,000 is about $85,500 a year. Many borrowers cannot get a second loan on those terms. Our blog on what you can realistically borrow explains how lenders assess you.
A smaller deposit leaves a thinner cushion. This table shows the equity left (value minus loan) if prices fall right after purchase, before selling costs.
Negative equity is rare at the moment. The RBA’s Financial Stability Review found that fewer than 1% of borrowers owe more than their property is worth. The borrowers most likely to be in that group are recent buyers and those with high loan-to-value ratios, which is where Strategy B starts. Negative equity does not force a sale if you can keep making repayments, but it can limit your ability to refinance or borrow again.
A loan that stays the same size gets smaller relative to an asset that grows. As a hypothetical, suppose someone borrowed $200,000 against a property 30 years ago and never paid down the principal. If that property is now worth $2 million, the same debt is a 10% loan-to-value ratio.
That is the long-term pattern behind leverage. It only works if you can keep servicing the loan, the asset grows, and you hold for long enough. Our using equity to buy an investment property blog explains how growth can fund the next purchase.
Paying 20% and avoiding LMI is often the better choice when:
You do not have to choose between a 20% deposit and two properties. Some investors buy one property with a 10% deposit, pay the LMI, and keep the remaining $50,000 in an offset account as a buffer. They add a second property later, once their capacity and cash flow allow it.
Many investors start with one purchase and add more after seeing how holding costs and the market behave. Whatever you choose, getting started matters more than finding the perfect deposit size.
If any answer is no, one property, either with 20% down or with 10% down plus an offset buffer, may be the better start.
At Search Property, we help Australians cut through the noise and build data-driven investment strategies aligned with long-term wealth goals. Our buyers agents have helped thousands of clients build wealth through property because we focus on fundamentals, not headlines.
Book a FREE investment assessment call with Search Property.
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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