You’re on the hunt for a home loan, and your bank is asking for 'genuine savings.' But what exactly are genuine savings, and how do they stand out from the crowd?
when a bank labels your savings as 'genuine,' it adds a dash of credibility to your financial profile. It's like telling the bank, "Hey, I'm serious about this homeownership thing, and I've got the savings to prove it!" This credibility can make a world of difference when it comes to getting your home loan application across the finish line.
What are genuine savings?
In the realm of Aussie home loans, genuine savings are more than just a regular money stash – they're funds patiently accumulated over time through consistent saving or smart investments. These savings are a powerful way to show lenders your financial prowess and commitment to responsible money management.
If you’re stashing away a portion of your salary every month for a few years, all with the goal of snagging that dream home. That accumulated amount in your bank account? That's your ticket to genuine savings. Lenders love to see this kind of financial discipline when you're on the prowl for a home loan.
Now, here's the deal – your savings are either 'genuine' or 'non-genuine,' and many lenders prefer the real deal. Before sealing the home loan deal, you'll likely need to make a deposit, and genuine savings are the gold standard that lenders often look for. So, if you're serious about turning that dream home into a reality, genuine savings might just be your secret weapon!
Home loans and genuine savings
When applying for a home loan, your lender has to verify that you meet the eligibility criteria, ensuring you are a suitable candidate for the loan. In Australia, while specific requirements may differ among lenders, you can generally expect them to request essential information, including your personal details, the property value, the loan amount needed, and your financial situation.
Lenders usually mandate a 20% deposit, and failing to meet this requirement could result in the need for lenders mortgage insurance (LMI).
The following are commonly considered genuine savings:
- Savings held for at least three months.
- Term deposits maintained for a period exceeding three months.
- Funds that have been contributed through salary sacrifice as part of the First Home Super Saver Scheme.
- Shares or managed funds held for a minimum of three months.
- Inheritance funds that are held for at least three months.
- Dividends or bonuses held for three months.
- Rental payments.
- Equity from an existing property such as residential property.
Genuine savings are considered genuine by lenders only if:
- They are held in the name of at least one of the borrowers for more than three months.
- They are liquid, meaning they should be held in a bank savings account or a comparable form of investment that can be readily sold and converted to cash, such as publicly traded shares.
- They are authenticated through documentation, typically in the form of bank statements. The history of genuine savings should be verifiable by providing a track record spanning three months or more, depending on the specific requirements of the lender.
Lenders distinguish genuine savings from other sources of funds; what sets genuine savings apart is the nature of their accumulation.
What are non-genuine savings?
Non-genuine savings refer to funds that have been recently obtained and have not been saved by the individual or held in their possession for a minimum of three months. Non-genuine savings may not provide the same level of confidence in your financial stability. This may include:
- Money received through inheritance.
- Gifts or windfall proceeds.
- Lump sum deposits.
- Credit cards
- Proceeds from the sale of an asset like a car or real estate.
- Deposit funded by others like parents or family members.
- Proposed savings or rental-purchase plan.
- Personal loans do not effectively showcase your ability to save, and only a limited number of lenders will consider them as a suitable deposit. Transferring the funds from a personal loan to a bank account for three months does not meet the criteria for genuine savings. Moreover, such a practice can negatively impact your credit score.
- Savings not held in your account.
- Tax refunds.
- Proceeds from the sale of shares.
Note: You can transform any deposit into genuine savings over a period of time. Place the funds into a savings account, contribute to it monthly for three consecutive months, and there you have it: genuine savings.
It's important to note that this doesn't apply to a deposit obtained through borrowing.
Can you convince lenders to use rent as genuine savings?
Certain lenders may be willing to make an exception to their genuine savings policies on savings requirements, provided you can demonstrate a robust history of rental payments. You need to be in a rental arrangement. While many lenders typically require a minimum of 12 months of rental history, some may consider three months of consistent, on-time rent payments. Whether you rent privately or through a licensed property manager, eligibility is assessed on a case-by-case basis for private rentals. It's essential that the tenants listed on the lease match the borrowers named in the home loan application. If you fulfil these criteria, lenders will evaluate the rent you've paid over the last three months as an alternative to genuine savings.
In any case, make sure to have a chat with your mortgage broker before approaching a lender.
How do you build and grow your genuine savings for a home loan?
Automate the transfer of a lump sum into your savings account
Consistently depositing money into your savings is an effective strategy for wealth-building and demonstrates to lenders your ability to save consistently. Automating the transfer also safeguards against the temptation to spend on unnecessary items.
Practice proper budgeting and monitor your expenses
If you have a specific savings goal, such as a house deposit, structuring your budget around that objective is advisable. Evaluate your financial situation to identify areas where you can reduce spending. Maintaining a clear understanding of your monthly (or weekly) earnings and expenditures is crucial. Consider keeping an expense diary or using an app for streamlined expense tracking.
Minimise unnecessary expenditures
While cutting back on non-essential spending may pose a challenge, it is imperative when saving. This includes curtailing daily small splurges that accumulate over time. If the temptation to dip into your savings is high, consider securing your funds in a term deposit or a savings account with withdrawal penalties.
Invest surplus funds and bonuses
Whether it's a substantial tax return or a salary increase, redirecting such windfalls directly toward your savings goal provides an immediate boost to your finances. Rather than impulsively spending, channel these additional funds into your savings for accelerated progress toward your objectives.