When it comes to applying for a home loan, lenders will want to see that you have saved a certain amount of money to put towards your deposit. A deposit usually needs to be between 5 and 10% of the value of the property – at a minimum – which shows the lender you are responsible with money.
The other thing you need to ensure about your savings is that they are considered ‘genuine savings’. Genuine savings is a common term in the home loan industry and refers to viable savings that can be put towards your loan. Let’s explain it in greater detail.
What are genuine savings?
If you only have a 5% deposit, be aware that this needs to be considered “genuine” savings – i.e. it’s not dependent on your brother selling his car, or a loan from a friend. These are the things that make lenders nervous.
Your deposit will affect how much you are able to borrow from your lender and the lender wants to see that you’ve saved it yourself and are responsible with money.
The following are often classed as genuine savings and must be held in the borrower’s name:
- Savings in a savings account bearing your name that you have held for more than three months
- Any term deposits you have held for at least three months
- Managed funds and shares held for more than three months
- Equity in residential property from previous property purchases.
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 a loan and occupy the property.
What are not considered genuine savings?
Please keep in mind that money from a parent or family member is known as a gift and not considered genuine savings. Generally speaking, the following examples are also usually not 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 (see above)
- Rent payments, although this varies depending on the lender
- Your tax return
- Money gained from selling an asset, such as a car
- A bonus from work
- Money you’ve borrowed from somebody else
- Any money you hold in a business account
- The First Home Owner’s Grant (FHOG)
- Grants or bursaries received.
The issue with 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.
While many lenders don’t accept the First Home Owners Grant (FHOG) as genuine savings, you may be able to put it towards a deposit. As the FHOG is legislated under state law, most lenders will allow it to form part or all of your deposit. It’s best to clarify with your lender before you proceed.
You can also access some loans without genuine savings but 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.
In order to work out how much you can borrow, lenders will work out what is known as your Loan to Value Ratio (LVR). This is a percentage calculated by dividing the amount of the loan by the purchase price or appraised value of the mortgaged property. It is usually a key indicator of risk to a lender when considering a lending scenario. For example, if you borrow more than 80% of the value of your property, you will need to add Lender’s Mortgage Insurance (LMI) to your loan. LMI is a mortgage insurance premium that protects the lender’s funds should the borrower default on their repayments, and the property be sold for less than the outstanding debt on it.
If you’re paying LMI, some lenders will consider money received as inheritance or a gift as part of genuine savings. Speak to a uno home loan expert about your options.
Why do lenders need to see genuine savings?
Lenders are strict about genuine savings because of 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.
Lenders have genuine savings policies to ensure you’re not going to default on your loan. The LMI provider will look for evidence that you had genuine savings of at least 5% before paying out to the lender. If you don’t have genuine savings, the provider doesn’t pay. Hence, lenders make sure you have the 5% in genuine savings to further protect themselves.
Does paying rent count towards genuine savings?
Many lenders accept proof of consistent rent payments as genuine savings. This is because lenders want to see that you can manage your money and will continue to do so as a home owner or owner occupier. Paying rent on time serves this purpose in the same way that saving money does.
You will also have to meet several requirements, which vary depending on your rental history. For example, if you rented for less than six months, you can include such things as inheritance, gifts, work bonuses, tax returns and asset sales as part of your deposit. In most cases you will need a letter detailing how and when you will be receiving the monies or, if it’s an asset, proof that you have sold it.
If you have rented for more than six months you can use any deposit source as long as you can prove that you have made payments on time for at least six months; are still renting a property; and can provide a copy of your lease.
Getting a loan despite no genuine savings
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. Generally speaking, you will be unable to get a no genuine savings loan if you’re buying a property as an investment, wish to use the loan to buy land and build a home, or the property is in a rural area or small township.
The property’s value will also need to exceed $650,000, your net disposable income will be less than 110% of your current total debt and 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.
Common savings mistakes
Even if you’ve saved 5% of the home’s purchase price, you may get refused for a home loan. The following are common mistakes borrowers make when saving money:
- They place their savings in accounts outside Australia – a common hurdle for people on 457 visas.
- They place savings in the account of a friend or family member. Lenders want to see your savings in an account under your name.
- They have savings in a joint account. Some lenders require genuine savings to be in the account in your name only.
- They have received a loan from a relative or friend. 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.
Some useful savings tips for home buyers
To close, we’ll offer some basic saving tips you might like to consider to help you save for a deposit:
- Avoid impulse spending: Carefully consider all purchases. If you don’t need it, don’t buy it.
- Create a budget: Cut unnecessary expenses and put the money you’ve saved towards your deposit.
- 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. Save leftovers to eat the next day.
- Sell things you don’t need: Sell old clothes, appliances and toys online or at markets. Every little bit helps.
- Ask for a discount: Many 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 you saved into your savings.
- Pay off any personal loans: Lenders consider personal loans and car loans forms of debt.
- Cancel unused cards: Get rid of any club memberships you don’t use. The same goes for old credit cards.
This information is general in nature and you should always seek professional advice when making financial decisions.
With Hannah Tattersall