What lenders mortgage insurance actually covers, and the costs outside the rate

The interest rate is the number that gets compared, and it is not the whole cost. Some of what a home loan costs is disclosed in the contract rather than in the advertising, and one item there insures somebody other than the person who pays for it.

The insurance that protects the other party

Lenders mortgage insurance is the clearest example, and ASIC's definition leaves nothing to interpretation:

Lenders mortgage insurance protects a credit provider if borrowers are unable to repay their loan. LMI is usually a one-off cost to a home loan borrower, payable when the amount borrowed exceeds 80% of the value of the property. LMI does not benefit the borrower, it only protects the lender.

Three things follow from that, and the third is the one that surprises people.

It is triggered by the loan-to-value ratio, not by the borrower. It applies when the amount borrowed exceeds 80 per cent of the property's value, which is to say when the deposit is under 20 per cent. It is not a judgment about a particular applicant.

It is paid by the borrower. ASIC states that you pay it at settlement, or the lender adds it to your loan. Where it is added, it becomes borrowed money like everything else in the balance, and it accrues interest for as long as it remains outstanding. A cost described as one-off is one-off in the sense that it is charged once, not in the sense that it is paid once.

It does not protect a guarantor either. ASIC makes this explicit, and it is worth stating because a family member providing security has every reason to assume otherwise.

If the lender claims on the policy after a borrower defaults and the sale of the property does not cover the debt, the insurer pays the lender. That does not extinguish the borrower's obligation.

The insurance that does protect the borrower

There is a separate product that is easy to confuse with it, and the contrast is instructive.

Consumer credit insurance, sometimes called mortgage protection insurance, is sold alongside personal loans, credit cards and some mortgages. It is designed to help the borrower when they cannot meet repayments because of job loss, sickness, injury or death. It is optional.

ASIC's 2019 review of the product produced a figure worth carrying: across all consumer credit insurance products, only 19 cents was paid out for every dollar paid in premiums. For policies sold with credit cards the figure was 11 cents. Following that review a deferred sales model applies, requiring lenders to wait four days after credit approval before offering the insurance, with a sale made inside that window cancellable for a full refund. ASIC's own suggestion is to consider whether income protection or life insurance would provide better value and broader cover.

So the two products sit almost opposite each other. One is effectively compulsory above a threshold, insures the lender and is paid by the borrower. The other is optional, insures the borrower's ability to pay, and is paid by the borrower. Both appear in the paperwork of a mortgage, and only one of them is there for the person signing it.

The costs that are simply not interest

ASIC names three categories of fee on a home loan.

• an application fee, a one-off payment when starting a loan, also called an establishment, up-front or set-up fee
• ongoing fees, charged monthly or annually for administering the loan, also called service or administration fees
• redraw fees, charged for accessing money paid ahead of schedule

None of these is interest, so none is in the advertised rate.

The law does require them to be disclosed, and the requirement is specific. The National Credit Code obliges the contract to contain a statement of the fees and charges that are or may become payable and when each is payable; the amount of each, or where that is not ascertainable, the method of calculating it; and the total amount of credit fees and charges payable to the extent that it is ascertainable.

The Code also requires the contract to state the method of calculating interest charges and the frequency with which they are debited, the repayment amounts and timing, whether a mortgage or guarantee has been taken, and whether commission is payable for the introduction of the credit business, including by whom and to whom.

The Code deals with comparison rates separately, and where one must be shown, what it must include and how it is calculated are a subject of their own, covered in when a comparison rate must be shown.

All of this must be provided before the contract is entered into or before the borrower makes an offer to enter it, whichever happens first, along with an information statement of the borrower's statutory rights. A copy of the contract itself must follow no later than 14 days after it is made.

The reversion nobody reminds you about

This is the part of the subject that a discount genuinely cannot explain, and it is a matter of statute rather than of lender behaviour.

Where a contract carries more than one interest rate, section 17(4)(b) of the Code requires it to state each rate and how each rate applies. So a loan that starts at an introductory rate and later reverts to a different one must set out both, and when the change happens, at the point the contract is signed.

Having required that, the Code then exempts exactly that situation from its notice regime. Section 63(2)(a) provides that the unilateral change provisions do not apply to a change to a new annual percentage rate if both the new rate and when it takes effect are ascertainable from the contract.

The practical effect: when an introductory period ends and the loan steps to a rate that was written into the contract at the outset, the lender is under no obligation from that regime to tell you it is happening. The disclosure was the one you received before signing, perhaps years earlier.

That exemption is narrow, and the surrounding obligations are strict. For rate changes not ascertainable from the contract, section 64(1) requires written notice no later than the day the change takes effect, subject to criminal penalty. At least 20 days notice is required before a change in the manner in which interest is calculated or applied, explicitly including the change or abolition of any interest-free period. 20 days notice is required before a change to the amount, frequency or timing of repayments, and again before a change to any fee or charge, including the introduction of a new one. None of the notice requirements applies to a change that reduces the borrower's obligations.

The pattern is consistent once seen: the Code requires notice of things the contract did not already tell you, and treats a contractually specified reversion as something you were already told.

What to actually read

The disclosure exists. It is in the precontractual statement and the contract, in the sections the Code requires, and it is generally the least-read part of the transaction.

Three things repay attention in particular. Whether there is more than one rate, and if so what the second one is and when it starts. What the fees are, when each is payable, and the total where the contract states it. And whether any insurance is financed under the contract, in which case the Code requires the insurer's name, the amount payable and, where the credit provider knows of it, any commission the insurer pays.

Where to look next

• Home loan rates - the reference page for the category.
• When a comparison rate must be shown - the single figure meant to capture rate and fees together, and the loan it is calculated on.
• Loan-to-value ratio - the ratio that triggers lenders mortgage insurance.
• Comparison rate - the term in glossary form.

Sources

• ASIC MoneySmart, lenders mortgage insurance (LMI) - the definition that it protects a credit provider if borrowers are unable to repay, that it is usually a one-off cost payable when the amount borrowed exceeds 80 per cent of the value of the property, and that it does not benefit the borrower and only protects the lender
• ASIC MoneySmart, Save for a house deposit - that lenders mortgage insurance protects the lender if the borrower cannot repay and does not protect the borrower or a guarantor, that it applies above an 80 per cent loan-to-value ratio, and that it is paid at settlement or added to the loan by the lender
• ASIC MoneySmart, Choosing a home loan - the application fee and its alternative names, ongoing monthly or annual service and administration fees, and redraw fees
• ASIC MoneySmart, Consumer credit insurance - that the cover is optional and is sold with personal loans, credit cards and some mortgages to help the borrower who cannot repay because of job loss, sickness, injury or death, the 2019 review findings of 19 cents paid per premium dollar across all products and 11 cents for cover sold with credit cards, the four-day deferred sales period and the refund right, and the suggestion to consider income protection or life insurance instead
• National Credit Code, Schedule 1 to the National Consumer Credit Protection Act 2009 - the precontractual disclosure obligation and its timing and the information statement; the contract content requirements covering the annual percentage rate or rates and how each applies, the method of calculating interest charges and their debiting frequency, repayments, credit fees and charges with their timing and total, mortgage or guarantee, commission, and insurance financed under the contract including the insurer's name, the amount payable and known commission; the 14-day contract copy rule; the exemption of a contractually ascertainable rate reversion from the unilateral change notice regime; and the notice obligations and periods for interest rate changes, changes to the manner of calculating or applying interest including an interest-free period, repayment changes and fee changes including new fees

Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.