Two in five potential home buyers do not understand what lenders' mortgage insurance (LMI) actually does, according to a survey conducted by Mortgage Choice.

And one-third of the survey's respondents thought LMI was something they needed to pay in order to enter the property market.

LMI is generally compulsory for all borrowers who do not have enough money to afford the 20 per cent deposit for a home purchase.

What is alarming is that, out of the 1,000 people the mortgage broking firm surveyed, more than 25 per cent were mistaken about who benefits from LMI. In particular:

8 per cent incorrectly thought mortgage insurance protects the borrower, and

8 per cent incorrectly thought mortgage insurance protects the borrower, and Almost 18 per cent assumed it protected both the borrower and lender.

If the borrower can no longer afford to pay off their home loan, the bank or lender can recover money from the insurance company.

But what many borrowers fail to understand is that the insurer will then chase after them to recoup those funds.

Nearly two years ago, an ABC investigation found struggling homebuyers are being forced into bankruptcy over LMI policies.

The nation's two big mortgage insurance providers, QBE and Genworth Financial, had launched bankruptcy proceedings in court against dozens of debt-ridden homebuyers in the past decade.

Gender, age and geographical split

A higher proportion of women (45 per cent) did not know what LMI is — versus 37 per cent of men in the Mortgage Choice study.

When segmenting by age, those who were 29 or younger were least likely to understand mortgage insurance (47 per cent).

So how did the different states hold up?

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 7 minutes 38 seconds 7 m Helen and Joe Tollan are paying $450-a-week after defaulting on their mortgage

Almost half of Victorian and Western Australian respondents failed to understand LMI (46 per cent to be precise), followed by Queenslanders (almost 40 per cent).

"The reality is that saving for a home deposit is a major challenge for first-home buyers and this has been the result of strong price growth over the last few years," said Mortgage Choice's chief executive Susan Mitchell.

The median property price on a national basis — across all states and territories — is $554,605.

Property analytics firm CoreLogic found that the median property prices in Sydney and Melbourne are $875,816 and $720,433 respectively.

With high prices like that, prospective property buyer face a significant dilemma.

"While LMI on the surface seems like a fee to be avoided, it does have the benefit of helping a buyer purchase a home with a smaller deposit, thereby allowing them to get onto the property ladder sooner rather than later," Ms Mitchell said.

"A buyer can choose to delay their property purchase to save a sufficient deposit, but the reality is property prices have risen consistently and the longer they delay, the more likely they are to miss an opportunity."