How Genuine Savings Help You Access More Home Loan Products
Genuine savings is a common term in the home loan industry. Most lenders will want to see that borrowers can save a certain amount of money in bank accounts under their own names. In most cases, these savings should be at least 5% of the value of your property. This increases to 10% for investors.
You may require genuine savings even when buying a house without a deposit. The ability to save shows the lender you are responsible with money.
What Are Genuine Savings?
Lenders don’t consider all types of savings to be genuine savings. In fact, the definition of genuine savings varies among lenders. However, on a general level, the following are often classed as genuine savings (all must be held in the borrower’s name):
• Managed funds and shares held for over three months.
• Savings in an account bearing your name that you have held for over three months.
• Any term deposits you have held for at least three months.
• Equity in residential property.
Some lenders mortgage insurance providers may allow a gift or inheritance to be used where savings have been sacrificed by making accelerated loan repayments over the last three months.
In some cases, a lender may consider rent payments as a genuine saving. You may also need to show your savings records over a period of six months instead of three. It all depends on the lender.
The key is that your combined genuine savings should total at least 5% of the property’s value. And you’ll need to have these savings before you take out the loan and occupy the property.
What Isn’t a Genuine Saving?
It is also important that you understand what isn’t classed as a genuine saving. This will prevent you from relying on money that you can’t use towards home loan products.
The following are not always classified as genuine savings:
• A deposit as a lump sum, though lenders may make exceptions if the deposit comes from another property sale.
• A savings plan.
• Money from inheritance or gifts (though some lenders mortgage insurance providers may allow this where savings have been sacrificed by making accelerated loan repayments over a three month period).
• Your tax refund.
• Money gained from selling an asset, such as a car.
• A bonus from work.
• Money you’ve borrowed from somebody else, be that an individual or lender.
• Any money you hold in a business account.
• The First Home Owner’s Grant
• A builder’s or vendor’s rebate or incentive
The issue with each of these is that they don’t show good savings habits. Instead, they only show that you’ve come into some money. Unless you can back them up with something substantial, most lenders will refuse these as genuine savings.
Beyond this, many lenders don’t accept the First Home Owners Grant (FHOG) as genuine savings. But, this doesn’t mean you can’t use the FHOG towards a deposit. Further, most don’t class any grants you receive for building your own home as genuine savings.
Remember, this is a general overview. Some lenders may class such funds as genuine savings. It helps to talk to an expert to find out which do.
Which Home Loan Products Need Genuine Savings?
Whether you need genuine savings depends on both the loan type and the lender. Generally, you won’t need genuine savings for any loan below 80% of your home’s value. A few lenders may require genuine savings for 85% home loans. Most require them for any loan above 90% of a home’s value.
Having said that, you can access some larger loans without genuine savings. This usually requires a guarantor.
Most home loans that don’t need genuine savings offer similar interest rates to loans that do. However, lenders will ask that you have stable employment and income. They may wish to see proof of assets and you will need a deposit. In some cases, the deposit can come from another source.
Using Rent as Genuine Savings
Many lenders accept proof of consistent rent payments as genuine savings. This is because lenders want to see that you can handle your money. Paying rent on time serves this purpose in the same way that saving money does. In these cases, the lender will allow you to source the deposit without dipping into your savings.
You will also have to meet several requirements. These vary depending on how long you have rented:
• Between Three and Six Months
If you have rented for less than six months, you can get your deposit from several sources. In each case, you must meet some conditions. These are as follows:
o Inheritance: You must have a letter from the account executor. The letter should detail the amount of money you will receive and when you will get it.
o Gifts: The gift giver must write a letter to confirm it. You should have the gift in an account bearing your name.
o Work Bonuses: You must provide account statements and payslips to prove you have received the bonus. The same goes for dividends from shares and commissions from sales.
o Tax Refund: The lender will need to see your Notice of Assessment to confirm the refund.
o Asset Sales Other Than Property: You must give proof that you have sold the asset.
• Over Six Months
If you have rented for more than six months you can use any deposit source as long as you meet these criteria.
o Proof that you have made payments on time for at least six months.
o Proof that you’re still renting a property.
o A copy of your lease. This is to show the lender that the name on your rental lease is the same as the one on your loan application.
o In the best case, you will rent from a licensed property manager. In some cases, those renting privately may still use the payments as genuine savings.
Beyond this, your lender may ask for a letter from your property manager. You may also need to provide a copy of the tenant ledger.
What Restrictions Do Renters Face?
Not all banks accept rent payments as genuine savings, even if you meet the above conditions. Those that do accept rent payments may be less lenient when creating your credit report. This means that other debts could prevent you from securing a home loan if you don’t have traditional genuine savings.
In some cases, you may need to combine rent payments with genuine savings. Some lenders ask that renters have 1% or 2% of the home’s value in genuine savings. Also, remember that you will still need a deposit.
It is a good idea to consult a mortgage broker to find out more. Doing so will help you access lenders who accept rent payments as genuine savings. You will also get a better idea of the requirements you must meet.
How Big Should My Deposit Be?
You will need to put down a deposit for most home loans. The main exception is a guarantor loan. Many lenders refer to the deposit as the ‘funds to complete’. Where this deposit comes from depends on your circumstances, as described above. First-time buyers can often use the FHOG as a partial deposit, though it won’t count towards genuine savings.
Beyond that, you may need to cover stamp duty. This depends on your region and if you are a first-time buyer. Many regions offer exemptions and discounts to stamp duty for new buyers. Research your area’s policies to find out what you can claim.
What about No Genuine Savings Loans?
Some lenders will offer home loans without the need for genuine savings. Usually, such loans have guarantors attached.
Each lender applies different restrictions to such loans. On a general level, you can’t get a no genuine savings loan if any of the following apply:
• You’re buying a property as an investment.
• You wish to use the loan to buy land and build a home.
• The property is in a rural area or small township.
• The property’s value exceeds $650,000.
• Your net disposable income is less than 110% of your current total debt.
• The land size for your property is above 2.2 hectares.
Again, there are exceptions to these rules. Speak to a mortgage broker or financial professional to explore your options.
Why Do Lenders Need to See Genuine Savings?
Lenders are strict about genuine savings because of the Lenders Mortgage Insurance (LMI). External providers of LMI insure any home loan above 80%. The LMI gives protection to the lender if you default on the loan.
Genuine savings come into play because the LMI provider will check the loan over if you default. They will look for evidence that you had genuine savings of at least 5% before paying out to the lender. If you didn’t, the provider doesn’t pay. Hence, lenders make sure you have the 5% in genuine savings to further protect themselves.
Common Savings Mistakes – The Deposit Source
You may have enough money to cover the deposit. Even so, you might fail a lender’s genuine savings check. This is often because of the source of the deposit. You’ll run into hurdles if you haven’t structured your savings accordingly.
Below are some common mistakes borrowers make when it comes to the location of saved money:
• Using a personal loan: Even if you keep the funds in an account for three months you will get refused. In fact, doing this may also damage your credit report.
• Relying on the FHOG: Most lenders do not accept the FHOG as genuine savings.
• Using a gift: As with personal loans, holding a gift for three months often doesn’t count as genuine savings. There are some exceptions to this.
• Using a First Home Saver Account (FHSA): Borrowers cannot open FHSAs as of July 2015. Even if you still have one, you may find some lenders don’t accept all the money in the FHSA as genuine savings. In particular, lenders tend to disregard the 17% government contribution.
Common Savings Mistakes – Where You Put Your Savings
You could get refused even if you have saved 5% of the home’s value. This is usually because you haven’t saved it in the way lenders want you to.
The following are common mistakes borrowers make when it comes to where they save their money:
• Placing some of their savings into accounts outside of Australia. This is a common hurdle for people on 457 visas.
• Placing savings in the account of a friend or family member. Lenders want to see your savings in an account under your name.
• Saving in a joint account. Some lenders prefer you to save in a solo account. However, there are many who will consider joint accounts as genuine savings.
• Transferring savings between accounts. This is okay as long as all accounts involved in the transfer bear your name. If this isn’t the case, lenders may not give you a loan. Lenders will also want to see regular contributions to all the accounts in the transfer.
• Loans to relatives and friends. A loan is rarely considered a genuine saving. Even if you repay the money quickly, it is not evidence that you can save responsibly.
As a general rule, you must be able to provide a paper trail for any money you use as genuine savings. Ideally, this trail will only include accounts held in your name. Lenders may accept savings in the following accounts as long as the trail checks out:
• Money held under a company name.
• Funds held in a trust.
• Money in the account of a de facto or marital partner. In this case, the partner must be a co-borrower on your home loan.
How Do Lenders Look At Your Savings?
Again, we come to the key point of proving that you can make loan payments. Lenders will look carefully at your savings to discover the needed proof.
Most lenders will want to see that your savings account has grown over time. This means that few lenders accept deposits of lump sums as genuine savings. Lump sum deposits usually come from savings related to asset sales or gifts.
Lenders will also look at your spending habits. In particular, they want to ensure you have no debts or expenses that you have not told them about.
Finally, there is the issue of redraw savings. Many borrowers will make extra payments on their loans to pay them off quickly. Every so often, some will then redraw a portion of these payments. This is usually done to buy something or save the money. Though considered financially responsible, redraw savings are rarely classed as genuine savings.
Some Useful Saving Tips
The above information offers a general overview of genuine savings. To find out more, you should consult a mortgage broker or financial advisor. Each lender has different policies. That means the information above may not match the policies of your lender.
To close, we’ll offer some basic saving tips on top of the information this article has covered:
• Avoid impulse spending: Carefully consider all purchases. If you don’t need it, don’t buy it.
• Create a budget: Get your partner involved in saving. Your budget should cut unneeded expenses. The money you save can go towards your genuine savings.
• Plan your meals: Create a menu for the week. This will help you shop efficiently so you avoid overspending on food you don’t eat. You should also save your leftovers. You can often make extra meals out of the food you didn’t eat the night before.
• Sell things: Get rid of old clothes, appliances, and toys. Go through your house and find anything you don’t need.
• Get discounts: A lot of companies offer discounted rates to loyal consumers. Don’t be afraid to ask. The worst they can do is say no. If you get a discount, place the extra money into your savings.
• Cancel unused cards: Get rid of any club memberships you don’t use. The same goes for old credit cards.
These tips offer a good start. The information in this article is general in nature. Please seek advice from a licensed professional when making financial decisions.