When applying for a home loan, it’s likely you’ll be requested to provide proof of genuine savings.
Lenders will use this term for home loan applicants to demonstrate they are capable of saving money, or reliable with money over time.
If the LVR (Loan to Value Ratio) is more than 85%, lenders usually require proof of genuine savings, although in some instances, certain lenders don’t require genuine savings up to 90%.
In contrast, non-genuine savings are funds a borrower may have access to, but which haven’t been gained as a result of saving over a period of time.
Different lenders may have varying requirements concerning genuine savings, largely dependent on their policies and the amount being borrowed.
It’s important to note that the definition of genuine savings can vary significantly between lenders!
Online savings calculators on the Internet can be handy to determine how much may be required in genuine savings. Your mortgage broker can also help you with this, as well as the likelihood of your total genuine savings being accepted by lenders.
If they total over 5% of the property purchase price for a home owner, or 10% for an investor, genuine savings may be from one source, or a combination of any of the following:
- Term deposits of at least 3 months
- Savings of at least 3 to 6 months (accumulated or maintained)
- Shares/managed funds held for at least 3 months
- Salary sacrifice in the First Home Super Saver Scheme
- Shares, held for a minimum of 3 months
- Gifted funds, held in the borrower’s account for a minimum of 3 months
- Inheritance, held in the borrower’s account for a minimum of 3 months
- Equity in a current property, held in the borrower’s name.
It should be noted that for most of the above criteria, a minimum timeframe of three months applies.
When considering genuine savings, lenders are looking for more than money in your savings account. They are looking for evidence that you’ve saved and planned for a deposit, which demonstrates to them you’ll be a good borrower.
Lenders may investigate savings to ensure they haven’t been deposited from another source and added to look like genuine savings.
Acceptable genuine savings must be:
- In the name of one (or more than one) of the borrowers
- In a savings account, or as investments which can be sold and easily converted to cash
- Easily proven (i.e. in a bank statement) and with 3 – 6 month history.
What Is NOT Considered as Genuine Savings?
Different lenders have different criteria, and some of the below may be acceptable proof of genuine savings if held in the borrower’s account for a period of at least three months.
Depending on the lender, some of the below may not be considered as genuine savings, especially if held in an account for less than three months.
- Tax refund
- Selling assets (other than property)
- Savings plans
- Lump sum deposit
- First Home Owners Grant
- Borrowed funds (such as a personal loan)
- Savings that fluctuate greatly
What is and isn’t considered as genuine savings may overlap, i.e. one lender may approve gifted funds as being genuine savings, while another lender may not.
As can be seen above, genuine and non-genuine savings can obviously differ between lenders, however essentially, genuine savings are accumulated, while non-genuine savings are not. Genuine savings prove to a potential lender that you are capable of saving and able to meet your repayment obligations.
Your mortgage broker will be able to offer professional advice on what is likely to considered as genuine savings, as well as what isn’t.
Although the above mentioned are not usually acceptable as proof of genuine savings, there are exceptions where lenders may take some of the above into account. Again, your mortgage broker can advise you in this regard.
Lenders Mortgage Insurance
The primary reason lenders are so stringent when it comes to proving genuine savings is largely due to Lenders Mortgage Insurance.
Lenders engage external companies to provide Lenders Mortgage Insurance, which is applicable for home loans that are over 80% of the value of the property. Lenders Mortgage Insurance decreases the risk to the lender if you are unable to repay the loan.
In this event, the external mortgage insurer will audit the original approval by the lender, and the insurance claim is unlikely to be successful if the lender didn’t have proof of a minimum of 5% in genuine savings by the customer.
No Genuine Savings?
Your mortgage broker can offer you professional advice and assistance if you don’t fit into any of the abovementioned categories concerning genuine savings.
For example, if your application is convincing in other areas, such as employment history and income, lenders may be more lenient regarding genuine savings.
If you are borrowing less than 80% of the property’s value, you may not be required to prove genuine savings to a lender.
Some lenders are also more flexible than others, taking personal circumstances into consideration. Nowadays, many lenders may accept proof of paying rent as the borrower’s ability to meet loan repayments.
As note, the criteria for genuine savings varies between lenders, and depending on circumstances, may not even be necessary.
If you don’t have genuine savings, your mortgage broker should be familiar with certain lenders who don’t require genuine savings, or have more flexible conditions. If this is the case though, you may be required to pay a higher amount in Lenders Mortgage Insurance.
Another alternative may be securing a guarantor, which is generally a family member who is prepared to guarantee the deposit amount. This also negates having to pay Lenders Mortgage Insurance.
Your mortgage broker is experienced in home loan applications and has access to a wide range of lenders with varying conditions and criteria. Your mortgage broker can assist you with what is regarded as genuine savings by lenders, the various requirements of different lenders, as well as offering guidance and support if you feel you don’t have genuine savings to offer when applying for a home loan.