FIRST HOME BUYERS: THE IMPORTANCE OF GENUINE SAVINGS
As the number of buyers purchasing the first home with a minimal or insufficient deposit is growing, lenders have recently introduced policies regarding genuine savings.
If you are a first home buyer and the deposit for your dream house is less than 20% it is crucial you understand the importance of generating this kind of savings and how do they impact on your loan application.
What are genuine savings?
The lending industry use the term genuine savings to refer to the money you can accumulate over time, e.g. saving a 15% of your income every month is considered genuine savings, while a $50.000 deposit in your saving account due to the sale of an asset it is not considered “genuine”.
Lenders through genuine savings policies measure the ability a borrower has to make regular payments. Let’s say you consistently saved $400/week, every week for 5 years, you committed yourself with regular payments, you most probably even had to make some efforts and make sacrifices at times so it is very likely you can do it again.
Here is a list of what are often considered to be genuine savings, note that it may vary from lender to lender:
- Savings (term deposits or high-interest savings account) if held for 3 months
- Real estate equity
- Inheritance funds if held for 3 months
- Cash gift if held for 3 months
- Shares/managed funds if held for 3 months
Genuine savings are required when you are borrowing more than 80% of the property value, in most cases more than 85%. Generally, you will be required to have 5% of the property price already saved. So, if you are borrowing $500.000 you will be required to have $25.000 saved. However with each lender having their own individual policy it is best to seek advice to discuss your own situation as it’s very common for lenders to decline high value ratio loans because of issues around genuine savings.
The reason why these policies are so strict is due to the LMI – lenders mortgage insurance.
When your deposit is less than 20% you are considered high risk borrower and as a security, lenders insure the risk of your default with an external insurance company. In the unfortunate event the lender has to make a claim, the insurance company will audit the original approval conditions. In the case the 5% deposit can’t be proven, the claim won’t be paid. The LMI doesn’t have to be necessary paid upfront, it can be capitalized with the cost of your loan.
What are not considered as genuine savings?
Every saved amount of money or item, other than equity, that is not held over a period of three months or that doesn’t show a savings pattern cannot be considered genuine savings.
Listed here some examples:
- Lump sum deposits
- Short-term savings
- Tax refunds
- Funds held in a business account
- Gifts or windfalls
- Sales of assets other than property
- Borrowed funds (e.g. existing loans)
- First home owners grants
- Developer’s/builder’s rebates/incentives
How do I prove my savings are genuine?
You will need a bank statement showing you have been making payments on a regular basis in your saving account; but keep in mind that withdrawals from the account can negatively affect the choice of a lender.
To do so, one of the better ways to generate savings and prove them is to set up direct debit payments to your savings account. Open a high interest savings account, better if in a bank different than yours (e.g. you are with NAB, open a saving account with ANZ), and possibly with no plastic attached (so you won’t be tempted to spend any of them). Then set up a monthly direct debit payment to your new account.
Direct debit is an exceptional and accessible way to ensure you save money, all you need to do is to make sure there will be money in your account when the payment is due.
What if I don’t have genuine savings?
If you do not have genuine savings, or you are not sure about it then speaking to a broker can help. Different lenders have different requirements when it comes to genuine saving policies, in fact some of them don’t require that you have genuine savings at all. Very often guarantor loans are an option for those without genuine savings.
Here at Prosper Finance we will help you understand whether your savings qualify as genuine or not, what are your options if you don’t have genuine savings and help you determine how much more to save until you can apply for your loan.