Key Takeaways
- Most lenders cap cash-out at 80% loan to value ratio (LVR), but a handful consider around 85% to 90% with lenders mortgage insurance (LMI) and stronger purpose evidence.
- LMI is a one-off premium that can usually be capitalised into the loan, though doing so lifts your LVR and the premium slightly.
- Paying LMI can beat waiting when prices are rising faster than the premium costs you; in a flat market, waiting often wins.
- LMI on investment borrowing may be deductible over five years as a borrowing cost, so confirm the treatment with your accountant.
Read almost anything about equity release and you meet the same line. Lenders let you cash out to 80% of your property’s value, and that is the end of it. Many borrowers treat an 80% loan to value ratio (LVR) as a legal limit. It is not. It is simply where most lenders stop lending without lenders mortgage insurance (LMI). Beyond it, a smaller group will still consider cash-out to around 85% to 90% LVR, provided you pay the premium and can show clearly what the money is for.
That is a real decision for investors with some equity but not quite enough. An equity loan broker can model whether paying a four- or five-figure premium to release the funds now beats waiting for repayments and price growth to lift your usable equity past the 80% line. The honest answer depends on the numbers, and they cut both ways.
Why Lenders Restrict Cash-Out Above 80% LVR
The 80% threshold is not arbitrary. Above it, the buffer between the loan balance and the property’s value narrows, so a modest price fall could leave the loan worth more than the security behind it. LMI transfers that risk, protecting the lender, not you, if the loan defaults and the sale does not cover the debt. Because claims are likelier at higher LVRs, both the lender and the mortgage insurer scrutinise these applications closely.
Cash-out adds a second layer of caution. When you borrow to buy, the lender sees exactly where the money goes. When you release equity as cash, they cannot, so credit teams worry about funds drifting into gambling, business losses or living costs. High-LVR cash-out therefore carries tighter conditions than a purchase at the same LVR:
- Caps on the cash-out amount, often a set dollar figure or a share of the property value.
- Evidence of a specific purpose rather than a general reference to future investment.
- Conservative valuations, since the valuation drives the whole calculation.
- Extra scrutiny of income, debts and repayment history, because the mortgage insurer must also approve the deal.
In practice, your current lender may refuse cash-out above 80% while another considers it routinely. Policies vary widely, which is where a broker comparing a wide lender panel earns its keep, matching your purpose and profile to a lender whose credit policy allows it.
What Purpose Evidence Lenders Ask For
The biggest difference between cash-out at 75% and at 88% is the evidence standard. Below 80%, many lenders accept a declared purpose with light documentation. Above 80%, expect to substantiate it:
- For a property purchase, a signed contract of sale, or confirmation you are actively looking with funds sometimes held until a contract is produced.
- For renovations, builder quotes or a fixed-price contract, and council approval for larger work.
- For shares or managed funds, a statement of advice from a financial adviser or evidence of the investment account.
- For debt consolidation, statements for the debts being cleared, with the lender often paying those creditors directly.
Where the purpose is a future purchase, some lenders release equity above 80% as a defined deposit fund, which pairs naturally with pre-approval for an investment property loan on the new purchase. Arranging both pieces together usually produces a cleaner outcome than handling them separately.
Paying LMI Now Versus Waiting
The decision comes down to numbers, all illustrative only, since premiums, growth rates and valuations vary. Suppose your home is valued at $1,000,000 and you owe $750,000, a 75% LVR. Cash-out to 80% releases $50,000, not enough for a deposit plus stamp duty and costs on the $750,000 investment property you want, before you even test your borrowing capacity on the new loan. Cash-out to 88% releases around $130,000, which is enough, but at 88% LVR the LMI premium might be around $12,000, typically capitalised onto the loan:
When Paying LMI Wins
Say the market you are buying into grows around 5% a year. On a $750,000 property, that is roughly $38,000 in year one and around $77,000 over two years. If waiting two years is what it would take to build the extra equity without LMI, the comparison is a one-off cost of about $12,000, plus perhaps $1,500 of interest on the capitalised premium, against roughly $77,000 of extra entry price and a larger deposit needed later. In a genuinely rising market, the premium can look cheap.
When Waiting Wins
Now run the same scenario with flat prices. Two years of principal repayments, say $30,000, plus modest growth on your own home could carry your usable equity above the line without LMI at all. The $12,000 premium, the interest on it, and any rate loading that sometimes applies above 80% LVR are then pure cost. If prices fall, waiting wins twice, because you avoid the premium and buy cheaper later. Waiting also keeps repayments lower, which matters if your income is variable or your buffer is thin.
When a Smaller Release Wins
There is a middle path between paying full LMI at 90% and waiting. Cash-out to 83% or 85% attracts a much smaller premium than 90%, and pairing a smaller release with a cheaper target property sometimes closes the gap on its own. Where the extra funds you need are modest, a partial step above 80% can cost far less than the leap to the top of the range.
Capitalising LMI
Most borrowers do not pay the premium in cash. Lenders usually allow it to be capitalised, added to the loan balance, so a $130,000 cash-out with a $12,000 premium becomes a $142,000 increase to your debt. Three things are worth understanding first:
- The premium scales with LVR, so capitalising it lifts your LVR and nudges the premium itself higher, and most lenders cap the final LVR including the capitalised premium, commonly around 90% for cash-out.
- The interest runs for the life of the loan unless you make extra repayments, so the true cost is the premium plus that interest.
- The premium is generally not refundable or transferable between lenders, so refinancing in two years will not recover it, and a new lender above 80% would charge a fresh premium.
One point investors often miss is the tax treatment. Where the released funds are used for income-producing purposes, LMI may be treated as a borrowing cost deductible over five years or the life of the loan, whichever is shorter. How the treatment applies depends on how the funds are actually used, so raise it with your accountant rather than assuming it applies.
Weighing the Decision Before You Commit
There is no universal answer, but there is a sensible order to the questions before paying LMI on a cash-out:
- The size of the gap the premium buys, since $12,000 for an extra $80,000 is a very different deal from $12,000 for an extra $20,000.
- The bank valuation itself, since a stronger figure sometimes clears the shortfall at 80% with no premium at all.
- Your honest read on prices, since the growth you would forgo by waiting is speculative unless a rise is genuinely likely over your waiting period.
- Your capacity to hold, since a higher LVR means higher repayments and less room for rate rises, vacancies or income interruptions.
Where most of these point the same way, the decision usually makes itself. Where they conflict, modelling the scenario across several lender policies is worth an hour of your time.
When the Premium Buys You Time
The 80% ceiling is a default, not a wall. For an investor short of a deposit in a rising market, paying LMI to release equity above 80% can be a calculated cost that buys entry years earlier. In a flat or falling market, the same premium can be money spent for nothing. What settles it is honest numbers on both sides, run against the policies of lenders that actually allow the release.
If you are weighing whether to pay LMI to release equity above 80%, the team at DIY Lending can talk you through the options that suit your circumstances.
Frequently Asked Questions (FAQs)
1. Can I really get cash-out above 80% LVR in Australia?
Yes, though not with every lender. A number of lenders consider cash-out to around 85% to 90% LVR with LMI, subject to tighter purpose evidence and mortgage insurer approval. Policies differ significantly on maximum amounts and acceptable purposes, so the lender you approach matters as much as your own financials.
2. How much does LMI cost on a cash-out refinance?
It varies with the loan size and the final LVR, rising steeply as you approach 90%. As a rough guide, premiums often land somewhere around 1% to 5% of the loan amount. Because it is a one-off cost, compare it against what the released funds achieve, not against the loan in isolation.
3. Does paying LMI on a refinance protect me if I cannot repay?
No. LMI protects the lender, not the borrower. If the loan defaults and the property sells for less than the debt, the insurer covers the lender’s shortfall and can still pursue you for it. Borrowers wanting personal cover should look at income protection or mortgage protection insurance instead.
4. Is LMI tax-deductible when the cash-out is for an investment property?
Potentially. Where the borrowing is for income-producing purposes, LMI is generally treated as a borrowing cost, which may be deductible over five years or the loan term, whichever is shorter. Eligibility depends on how the funds are actually used, so confirm the treatment with your accountant before relying on it.
5. Should I wait until my LVR drops below 80% instead?
Sometimes. If prices in your target market are flat or falling, or your repayments will carry you under 80% within a year or so, waiting avoids the premium entirely. Paying LMI mainly makes sense when the growth you would forgo by waiting credibly exceeds the premium and its interest cost.
This article is general information only. It does not take your objectives, financial situation or needs into account, and LMI premiums, cash-out policies and LVR limits differ between lenders and change without notice. You may wish to speak with a qualified professional, such as a licensed credit representative and a registered tax agent, before acting on anything set out here.