Mortgage Insurance Premium: What It Is and How to Keep It Low

If you’re buying a house with less than a 20% down payment, chances are you’ll see a line item called mortgage insurance premium (sometimes called PMI). It’s basically a fee lenders charge to protect themselves if you default on the loan. The good news? You can understand how it’s figured and even shave a few hundred pounds off each month.

How the premium is calculated

Most lenders work off a percentage of your loan amount. For a typical 30‑year fixed mortgage, the premium ranges from 0.3% to 1.5% of the loan each year. That sounds tiny until you multiply it by a £200,000 loan – you could be paying £600 to £3,000 a year, or roughly £50‑£250 a month.

The exact number depends on three things:

• Loan‑to‑value ratio (LTV): The higher the LTV, the higher the premium. A 95% LTV will cost more than an 85% LTV.
• Credit score: Good credit can knock a few basis points off the rate. Poor credit may push it up.
• Mortgage type: Some government‑backed loans have fixed insurance premiums, while private loans vary.

Ways to lower or drop the premium

Here are practical steps you can take right now:

• Boost your down payment: Even an extra 2% can move you from a 95% LTV to a 93% LTV, which often trims the premium.
• Improve your credit score: Pay down existing debts, keep credit card utilisation under 30%, and avoid new credit inquiries before applying.
• Ask for a lender‑paid option: Some lenders will cover the premium in exchange for a slightly higher interest rate. Compare the total cost over the loan term to see which is cheaper.
• Refinance once you hit 20% equity: After a year or two, your home may have appreciated or you’ll have paid down enough principal to drop the LTV below 80%. A refinance can eliminate the premium entirely.
• Consider an “offset” mortgage: Certain products let you link a savings account to your loan, reducing the effective balance and, in turn, the insurance cost.

Don’t forget to request an annual statement from your lender. It will show the current premium and the threshold at which the insurance will cancel. Many borrowers are surprised to learn they qualify for removal earlier than they thought.

Bottom line: mortgage insurance premium is a cost of borrowing, not a tax you can’t touch. By understanding the factors that drive it and taking a few proactive steps, you can keep more money in your pocket while you build equity.

Ready to start planning? Grab a calculator, plug in your loan amount, LTV and credit score, and see how different down payment scenarios change the premium. Small adjustments now can save you thousands over the life of your mortgage.