Many investors require prospective purchasers to have genuine savings when they apply for a loan. That is, the lender wants to see that you have the potential to save and put away funds over a period of time. Not every lender requires this and not every lender considers ‘genuine’ savings to be the same, however most of the time they will require a certain level.
While the difference between non-genuine and genuine savings differs, the main idea is that genuine savings are those you accumulate. This is rather than being a windfall you stumble into. This helps the bank know that you can repay regular amounts with diligence.
You can prove the existence of your genuine savings by showing bank transcripts of regular amounts being deposited into a savings account. Remember that withdrawals from that account can count against you and it’s worthwhile keeping similar dates and amounts for all of your deposits. This demonstrates discipline and available cash flow to your lender.
There are a number of other items that can count as ‘genuine’ savings. A term deposit, shares, a gift, an amount of cash, equity in a home and inheritance, if held for a period of time, can all count as genuine savings. Usually, a mixture of these will be accepted.
Often considered genuine savings:
- Regularly-accumulated savings held over a period of time
- Term deposits (held for minimum of three months)
- Shares (held for minimum of three months)
- Cash gift (held for minimum of three months)
- Inheritance funds (held for minimum of three months)
- Equity in a home
Not usually considered genuine savings:
- Recent gifts or windfalls
- Sales of other assets (other than property)
- Borrowed funds (e.g. personal loans)
- First home owners’ grants
- Short-term cash savings
Your savings and any of the other possible items, other than equity, should have been demonstrated over a period of three months. That is, you should have either held those assets for three months or you should have shown a savings pattern over a three month period. Some lenders require six months’ worth of savings.
In some cases, if you have been renting a property for over three months then this money may be able to be considered as genuine savings as it does demonstrate an ability to repay regular amounts.
You need to have a specific amount of genuine savings. In most cases this amount will be the deposit that you wish to use on your property. If you do not wish to incur the cost of lenders mortgage insurance then you will need an amount totalling 20% or above of the property’s final cost. Those willing to accept lenders mortgage insurance can potentially save as little as 5%. Some lenders only require genuine savings when the deposit is less than 15% and you are considered higher risk. Some lenders only require genuine savings for deposits that are even smaller than this amount. It’s worth looking online or speaking to your broker to determine what each lender needs to see demonstrated to ensure you are approved for your home loan. Some may be able to steer you towards the lender that is most likely to approve you in your current circumstances.
Usually, you will find that there is a threshold. If you have under 15% in your deposit then the genuine savings may need to be worth 5% of the property, with the rest of the funds from elsewhere. For investors, this figure can often be higher. Each lender has an individual approach to this equation.
A number of things count as non-genuine and are not included. This usually includes first home owners grants, short-term money that you haven’t held for the required length of time, funds you have borrowed including personal loans from institutions or family or the results of selling off things like your car or expensive items.
You will also find that the vast majority of lenders do not consider tax refunds, bonuses from your workplace and even funds you have held in a business account to be part of the ‘genuine savings’ component of your deposit.
What to do if you don’t have genuine savings
If you do not have “genuine” savings, then speaking to a broker can help. As mentioned above, some lenders have different requirements and some do not require that you have genuine savings at all, while others have certain products that cater to borrowers in this situation. You should speak to a mortgage professional about the implications of using a different lender and the possibilities of getting finance.
You can often use guarantor loans instead of genuine savings. Similarly, equity in an existing property is considered a replacement for genuine savings.
Often taking a few extra months to save the funds necessary to prove genuine savings can be worthwhile. This is particularly so if you haven’t found a home yet that you’re intending to purchase and are still researching. It’s worth considering how you can fulfil this requirement before you starting searching for a property as it may take you several months to be able to prove you meet the criteria.
Points to remember:
- Genuine savings differ from lender to lender
- Speak to your broker to determine how you may find a lender more suited to your situation
- Short-term savings rarely count
- You only need to prove up to a certain percentage level of genuine savings
- It’s not just ‘savings’ that count, but often also shares and other funds
- You can use equity instead of genuine savings