What is lenders’ mortgage insurance and how does it work?

What is lenders’ mortgage insurance?

Lenders’ mortgage insurance (LMI) is an insurance policy that protects a lender from financial loss in the event that a borrower can’t keep up their home repayments.

Don’t confuse LMI with mortgage protection insurance, which is an optional type of income protection insurance. Mortgage repayment protection insurance provides personal cover for your mortgage repayments if you become sick or disabled, die or lose your job. LMI is a policy that covers your lender. It’s their policy, you just pay the premiums!

LMI is also different to a:

• Low equity premium (LEP): added interest charged on a loan, usually between 0.25% to 1.5% p.a.
• Low equity margin (LEM): an additional one-off charge, approx a 2% premium on the amount of a loan.

When is lenders’ mortgage insurance required?

Generally, a lender can require you to pay LMI if your home loan deposit is less than 20% of the total value of the property you want to buy. A graded system applies. The bigger your deposit, the less you pay. The scale covers a range of deposits, from 5% up to the usual 20% deposit mark.

If you haven’t got a 20% deposit, your lender can make you pay for LMI and apply an LEP. Therefore, it’s worth doing your homework, assessing all your options and comparing the deals from a range of lenders.

What does lenders’ mortgage insurance cover?

It’s important to note that LMI is there to protect your mortgage lender. It’s not there to cover you. If you default on your home loan, and your home is sold for an amount less than the outstanding loan balance, your lender is able to make a claim with the LMI provider for the money it’s lost.

But this doesn’t mean that your debt is absolved. It’s important to note that you’ll still owe the shortfall debt amount, and you may have to repay that money to the insurer, rather than your original lender.

Lenders’ mortgage insurance and the First Home Loan

A First Home Loan is a special home loan for first home buyers, which only requires a 5% deposit. First Home Loans are underwritten by Housing New Zealand (a government corporation) and are issued by several lenders, including: ASB, Kiwibank, SBS Bank, The Co-operative Bank, Unity and Westpac.

Because borrowers only need a 5% deposit for a First Home Loan, they are required to pay a one-off extra LMI levy of 1.2% of their mortgage amount, which can be rolled into the loan.

→ Related article: What is the First Home Loan?

LEPs: the costs

For those with less than a 20% deposit, four of the banks listed below charge LEPs as annual extra interest charges, which, as you can see, can add up to an extra 1.75% p.a. Other lenders simple offer higher standard rates to low-deposit lenders. We’ve highlighted the lenders that offer loans under the First Home Loan scheme with an asterisk.

ANZ

ANZ doesn’t charge a low equity premium, instead it charges higher standard interest rates (about 60bps) for those with less than a 20% deposit.

ASB*

ASB’s low equity premiums:

• 80.01% – 85% LVR: 0.30% of loan amount p.a.
• 85.01% – 90% LVR: 0.75% p.a.
• 90.01% – 95% LVR: 1.30% p.a.
• Over 95% LVR: 1.50% p.a.

BNZ

BNZ’s low equity premiums:

• 80.01% – 85% LVR: 0.35% of loan amount p.a.
• 85.01% – 90% LVR: 0.75% p.a.
• 90.01% – 95% LVR: 1.20% p.a.
• Over 95% LVR: 1.50% p.a.

Kiwibank*

Kiwibank doesn’t charge a low equity premium, instead it charges higher standard interest rates (about 70-90bps) for those with less than a 20% deposit.

SBS Bank*

SBS doesn’t charge a low equity premium, instead it charges higher standard interest rates (about 60bps) for those with less than a 20% deposit.

The Co-operative Bank*

The Co-operative Bank charges a low equity premium of between 0.20-1.00% p.a. on top of its standard rates for borrowers with less than a 20% deposit.

TSB

TSB doesn’t charge a low equity premium, instead it charges higher standard interest rates (about 80bps) for those with less than a 20% deposit.

Westpac*

Westpac’s low equity premiums:

• 80.01% – 85% LVR: 0.25% of loan amount p.a.
• 85.01% – 90% LVR: 0.75% p.a.
• 90.01% – 95% LVR: 1.50% p.a.
• Over 95% LVR: 1.75% p.a.

(Rates correct at 24/06/2026)

Cheapest Home Loan Rates for First Home Buyers

On the lookout for the cheapest FHB loan? The table below displays some of the 2-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for First Home Buyers

How to avoid lenders’ mortgage insurance

Is it possible to buy a house without paying LMI? Absolutely! You could:

• Grow your deposit – there’s one simple way to avoid LMI, and that’s to save a 20% deposit. If saving is proving tough, consider setting your sights on a more affordable home, or apartment.
• Ask your parents for cash – if you’re lucky enough to have willing parents with deep enough pockets, you could consider asking them for help with your deposit, or to co-purchase the home with you.
• Ask family to act as a guarantor – if parents or relatives have enough equity in a property, they can use that as security to help you obtain a mortgage, by making up a percentage of your deposit.

Not all bad news

Yes, if you’ve less than a 20% deposit, it’s likely you’ll have to pay more for your mortgage, but it isn’t all bad news. Due to the way that LMI is calculated, as you pay off your loan and, hopefully, your property rises in value, your LMI should diminish as your equity in your home rises.

To ensure that you’re not out of pocket, you’ll need to keep a close eye on house prices in your area and the size of your debt. Banks won’t actively revise the LMI that you’re paying, unless you contact them and ask for a re-evaluation of the price of your home and your equity in it.

Ultimately, it pays to shop around. If you’ve a stable income and a good savings history, you could be able to negotiate a great deal even without a 20% deposit.

So make sure you do plenty of research before making a purchase decision. And that involves taking time to compare the different home loans available to you, which Canstar can help you with. Our comparison tables are easy-to-use tools that feature the best and most competitive deals in the market. Our expert research team awards the best our expert 5-Star ratings. To read more about our 5-Star home loan awards click here, or to compare rates using our free mortgage comparison tool hit this button:

Compare home loan rates for free with Canstar!

About the author of this page

Bruce Pitchers is Canstar NZ’s Content Manager. An experienced finance reporter, he has three decades’ experience as a journalist and has worked for major media companies in Australia, the UK and NZ, including ACP, Are Media, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. As a freelancer, he has worked for The Australian Financial Review, the NZ Financial Markets Authority and major banks and investment companies on both sides of the Tasman.
In his role at Canstar, he has been a regular commentator in the NZ media, including on the Driven, Stuff and One Roof websites, the NZ Herald, Radio NZ, and Newstalk ZB.
Away from Canstar, Bruce creates puzzles for magazines and newspapers, including Woman’s Day and New Idea. He is also the co-author of the murder-mystery book 5 Minute Murder.