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Should I pick the lender with the cheapest mortgage insurance or the cheaper rate? How do I decide?
Bayley Clarke · Mortgage broker on the road · Last checked 11 November 2026 · 3 min read
The short answer
You want to do a bit of a cost benefit analysis. Mortgage insurance is a once-off cost, the rate is something you pay every month, so you compare the two over a realistic timeframe rather than picking whichever headline number is lower.
I was doing exactly this the other day for some clients I'm helping buy their first home. One lender had lower mortgage insurance and a higher rate, the other a lower rate and higher mortgage insurance, and once we modelled it out, the higher insurance with the lower rate came out cheaper.
The 60 second version, filmed from the driver's seat. The rest of this page is the detail underneath it.
How we compared them
We ran a bit of modelling around what the next couple of years looked like. On one side, the higher mortgage insurance added to the loan, with a lower rate and lower repayments. On the other, the lower mortgage insurance with a higher rate and higher repayments.
The trade off we found was that it made more sense to go with the bank charging the higher mortgage insurance as a once-off. The lower rate meant the repayments were much less, and the total interest over the next couple of years came in under the other option, even once we factored in the extra insurance. So the cheaper looking option on day one was the more expensive one by year two.
What changes the answer
The biggest thing is time. Mortgage insurance is paid once, while the rate difference keeps adding up every month. The longer you keep the loan, the more the lower rate wins. If you're likely to refinance or sell in the first year or two, the once-off insurance weighs a lot heavier, because you've paid it and you don't get the years of savings to make up for it.
Mortgage insurance is also generally not refundable. A few lenders give back part of the premium if the loan is paid out in the first couple of years, but most don't, so don't count on getting it back. And if you add the insurance to the loan rather than paying it upfront, you pay interest on it too, which belongs in the comparison.
The other things on the scale
Rate and insurance aren't the whole picture. Offset accounts, fees, how the lender treats your income, and whether they'll actually approve you on your numbers all matter. A cheap rate is worth nothing at a bank that's going to knock you back or give you less than you need.
So what I do is line up the lenders that will say yes to your scenario first, then compare the real cost of each over the timeframe you're actually likely to hold the loan. That's how you end up with the cheapest option for you, not just the cheapest number on a website.
The honest bit: nobody knows exactly how long you'll keep the loan
The comparison only works on a timeframe, and life changes. A move for work, a bigger family or a big rate shift can all cut a loan short.
So we model a realistic timeframe and a shorter one. If one option wins on both, it's an easy call. If it flips, you'll know exactly what you're trading.
Comparing lenders with mortgage insurance?
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Next question
How much does lenders mortgage insurance cost, and can I add it to my loan?LMI protects the bank, not you, and you pay for it. The cost slides with your loan to value ratio: not much just over 80%.
Related answers
The full guide: You don't need a 20% deposit any more The full guide: Lenders mortgage insurance, explained Should I pay LMI or keep saving for 20%? Can I get a lender's mortgage insurance refund if I pay out the loan early or refinance? Aside from the rate, how do you even pick a lender? Why is the comparison rate higher than the interest rate?Not your question? Book a call and ask it, or call 0437 189 939.