Do You Pay LMI on a Construction Loan?
For many people looking for their dream home, available properties simply don’t have what they want and, instead, they choose to start from scratch and build exactly what they’ve been picturing. However, when you’re venturing into the realm of home construction, there are several financial considerations to take into account.
By
|

One significant factor is the potential requirement for Lenders Mortgage Insurance (LMI), and understanding whether LMI applies to your construction loan can influence your financial planning and decision making process. Here, you’ll find all of the information you need around the intricacies of LMI in the context of construction loans, helping you make informed choices ahead of your potential building project.
What is Lenders Mortgage Insurance?
Let’s start with the basics. Lenders Mortgage Insurance, commonly abbreviated as “LMI”, is a type of insurance that lenders take out to protect themselves against the risk of a borrower defaulting on their loan. Put simply, LMI protects the lender, not the borrower, and it is usually required when the borrower has a deposit of less than 20% of the property value.
How is LMI Calculated?
An LMI premium can vary based on the lender, the loan amount, and the Loan to Value Ratio (LVR). The LVR is a metric used to assess the risk of the loan, and it is calculated by dividing the loan amount by the property value and expressing it as a percentage. The higher the LVR, the higher the risk, and consequently, the higher the LMI premium.
Construction Loans: An Overview
So, now you know what LMI is. But what is a construction loan? Put simply, a construction loan is a specific type of loan that is designed to finance the building or major renovation of a property.
However, unlike traditional home loans, construction loans are typically disbursed in stages, corresponding to the different phases of the construction process. This can include the purchase of land, laying the foundation, building the framework, and completing the finishing touches.
This staged disbursement structure helps manage the financial risk associated with construction projects by ensuring funds are released progressively as each construction milestone is achieved.
Is LMI Required for Construction Loans?
This can depend on each lender’s own policies, but in most cases it is assessed on the Loan to Value Ration (LVR), and if the LVR exceeds 80%, most lenders will require LMI on a construction loan.
The main reason for this is because of the inherent risks associated with building projects and home loans where the LVR exceeds 80%. Construction can be unpredictable, with potential delays and cost overruns, and by requiring LMI, lenders can mitigate their risk and ensure that they are protected. The bank will also carefully manage the construction progress payments to ensure their position is not overexposed.
Strategies to Avoid or Minimise LMI
While you are very likely to pay Lenders Mortgage Insurance on a construction loan, there are some potential strategies you can use to either avoid or minimise the cost.
Increasing Your Deposit
One of the most effective ways of avoiding or minimising LMI is by increasing your deposit to at least 20% of the property value. While saving a larger deposit can be challenging for many borrowers, taking the time to do so is often worthwhile as it can reduce the LVR and, therefore, eliminate the need to pay LMI.
First Home Owner Grants and Government Schemes
In Australia, there are several government schemes and grants that are designed to assist first home buyers. Programs like the First Home Owner Grant (FHOG) can help you boost your deposit (by up to $10,000 in some cases), which can potentially bring it up to the 20% threshold needed to avoid LMI.
Guarantor Loans
Another option is a guarantor loan, which involves a family member using the equity in their own property to guarantee a portion of your loan, which can effectively reduce the LVR and help you avoid LMI. However, this arrangement carries its own risks, particularly for the guarantor who is liable if you default on the loan, so it isn’t something that should be entered into lightly. Learn more about guarantor home loans here.
The Impact of LMI on Your Construction Loan
Whether you’re able to reduce the amount of LMI you need to pay or not, there are important things you need to know about the impact it will have on your construction loan.
Upfront Costs vs. Loan Term Costs
LMI can either be paid upfront or capitalised into the loan (meaning it is added to the loan amount and paid off over the loan term), and each of these has something to consider.
Paying Lenders Mortgage Insurance upfront increases your initial out-of-pocket costs, which is something to be aware of when looking at the amount of money you have readily available. Capitalising it into the loan can increase your monthly loan payments and the total interest rate paid over the life of the loan, potentially costing you more money in the long run.
Effect on Loan Approval
Having a higher LVR and requiring LMI can impact the lender’s assessment of your loan application. This is simply because while LMI provides protection for the lender, a high LVR may still be seen as a higher risk. As a result, this could influence the terms of the loan offered, including the interest rate and other conditions.
How Can a Mortgage Broker Help with LMI on Construction Loans?
There are several things that a mortgage broker can help you with when it comes to dealing with LMI on construction loans, and at SimpliFi Lending, our expert team have a wealth of skills and knowledge that can make everything feel much easier. This includes:
Expert Advice
With our extensive knowledge of the mortgage market, including the intricacies of Lender’s Mortgage Insurance, we can provide valuable insights into how LMI works, the factors that can affect LMI premiums, and the specific requirements for construction loans, helping you make informed decisions and avoid common pitfalls.
Access to a Wide Range of Lenders
We also have access to a wide network of lenders and can compare different loan products between them, helping find you the best terms and rates for your construction loan. This includes identifying lenders with more favourable LMI policies, potentially saving you money in the process.
Negotiation on Your Behalf
Our expert team can also deal with lenders on your behalf to secure better loan terms, which can include negotiating lower LMI premiums or finding ways to incorporate LMI costs into your loan in a way that minimises your financial burden.
Assistance with Complex Applications
A construction loan can involve more complex applications that a standard home loan, and our team can help streamline the entire process by ensuring that all necessary documentation is provided and the application meets the lender’s criteria, taking all of the stress out of handling it yourself. This can also increase the likelihood of loan approval and potentially reduce the time it takes to secure your funds.
Budgeting and Financial Planning
We’ll also take a look at your current financial situation and help you incorporate LMI costs into your overall budget for the construction project. By doing this, we can provide you with a clear picture of all the associated expenses, including LMI, and help you plan your finances more effectively to ensure you are prepared for both the expected and unexpected costs of building your own home.
Ongoing Support and Advice
Our services don’t end once your loan is approved, and we’ll continue to provide you with ongoing support throughout the construction process, offering advice and assistance as needed. This ongoing relationship means that you have professional guidance at every stage, from initial loan application to the final construction phase.
How to Apply for a Construction Loan with Simplifi Lending
When you’re ready to start bringing your dream home to life, contact Simplifi Lending for a no-obligation consultation. We’ll take a look at your options, discuss potential lenders, and answer any questions you may have.


Speak to an expert mortgage broker
As mortgage brokers, we specialise in helping you piece together what is and isn’t possible, taking into account your unique circumstances.
We also offer the below to our clients:
- Free CoreLogic RPData property reports for properties you are looking at
- Free Home Buying Guide with additional information on clauses and the buying process
- Fully assessed pre-approval, to allow you to search with confidence