Owning a home is one of life’s most significant investments and is considered a milestone for many. However, the journey to home ownership can be a14 complex one, especially when it comes to understanding the financial aspects. One term that is of great importance in this journey is ‘genuine savings’. This article will aim to unravel the concept of genuine savings in the context of home loans in Australia, providing an in-depth understanding of how it influences your home buying process.
What is Genuine Savings?
To start, it’s essential to understand what ‘genuine savings’ means. Genuine savings are funds that a home loan applicant has saved over time, typically over a period of three to six months. The emphasis here is on the regularity and consistency of these savings. It is not merely about the amount saved, but the habit of saving that demonstrates financial discipline and sound money management skills.
A straightforward way to consider this is that lenders want to see that you can ‘walk the walk’, not just ‘talk the talk’. It’s easy to claim you can afford loan repayments, but by showing a consistent habit of saving, you are proving it in a tangible way.
Genuine Savings vs Regular Savings
Savings are generally money set aside for future use. However, the mortgage industry differentiates between regular savings and genuine savings, two terms that might seem synonymous but have different implications when applying for a home loan.
Regular savings refer to the money you’ve managed to set aside, regardless of the source. This could be from your monthly paycheck, a bonus at work, a generous gift from a relative, a tax refund, or the proceeds from selling personal belongings like a car or valuable artefact.
On the other hand, genuine savings are funds that have been saved consistently over a specific period. This consistency and regularity are vital, as they highlight your ability to manage your money responsibly and make regular payments – a crucial requirement when repaying a loan.
Why Do Banks and Lenders Require Genuine Savings?
From a lender’s perspective, issuing a loan is an investment and, like all investors, they aim to minimize risk. They need to have confidence that the borrower can repay the loan over its term. Genuine savings are viewed as a strong indicator of a borrower’s financial discipline and reliability.
By showing a pattern of regular savings, you demonstrate a sustained ability to commit to ongoing financial obligations. This pattern is proof that you can budget, save, and manage the financial responsibility of a mortgage. In essence, it signals to the lender that you are less likely to default on your loan repayments.
What is Accepted as Genuine Savings and What is Not?
When it comes to determining what counts as genuine savings, lenders typically consider the following:
- Savings or term deposits: Money that has been held or accumulated over at least three months in a savings or term deposit account.
- Shares or managed funds: If you have held shares or managed funds for at least three months, these can be considered genuine savings. This again demonstrates your ability to save and manage your finances.
- Equity in residential property: If you own property and have accumulated equity in it, this can be considered a form of genuine savings.
- Regular contributions to a savings plan: This demonstrates consistent savings behaviour and is usually accepted as genuine savings.
In contrast, there are funds that are usually not considered as genuine savings:
- Gifts or inheritances: While these might boost your savings, they do not demonstrate a consistent saving habit. Unless these funds have been held in your account for a sufficient period (typically three months), they are not considered genuine savings.
- One-off sales: Money gained from selling a personal item, like a car, doesn’t reflect a regular saving habit, and hence, isn’t usually considered as genuine savings.
- Tax refunds: These are usually one-off payments and don’t demonstrate an ability to save regularly.
- First Home Owner Grant and other grants: While these can contribute to your home deposit, they aren’t considered genuine savings as they don’t reflect your saving habit.
- Funds borrowed from a personal loan or credit card: These are not your funds and represent further debt rather than savings.
How Much Do I Need to Prove Genuine Savings?
As a general rule, lenders look for genuine savings that amount to at least 5% of the purchase price of the property you’re looking to buy. For instance, if you’re buying a home worth AUD 500,000, you should aim to have at least AUD 25,000 in genuine savings. However, this may vary depending on the lender’s specific requirements and the type of home loan product.
When Do I Need To Prove Genuine Savings?
The need to prove genuine savings typically arises under the following circumstances:
- You’re borrowing more than 80% of the property’s value: This is referred to as a high Loan to Value Ratio (LVR). In such cases, lenders may require proof of genuine savings to mitigate their risk.
- You’re a first-time homebuyer: If you’re new to the property market, lenders may ask for proof of genuine savings to ensure you have the financial discipline required to manage a home loan.
- You have a limited credit history: If you don’t have a substantial credit history for lenders to evaluate, demonstrating genuine savings can be a good way to show your reliability as a borrower.
It’s essential to understand that policies can vary between lenders, so always check with your chosen lender to understand their specific requirements.
How Can I Build Up My Genuine Savings?
Building genuine savings requires planning, discipline, and a touch of patience. Here are some strategies to help you along the way:
- Set a Budget: The first step to saving is understanding your income and expenses. Make a detailed budget that outlines all your costs and identifies how much you can realistically save each month.
- Automate Your Savings: To ensure consistency, set up an automatic transfer to your savings account each payday. This way, you’re saving without even thinking about it.
- Cut Unnecessary Expenses: Review your spending habits and identify areas where you can cut back. This might mean fewer dinners out, cancelling unused subscriptions, or switching to more cost-effective service providers.
- Increase Your Income: Consider finding ways to increase your income. This could involve taking on extra work, selling items you no longer need, or turning a hobby into a side business.
FAQs About Genuine Savings
Does rent count as genuine savings?
In some cases, lenders may consider rent as genuine savings, especially if you’ve been renting for a long time and can demonstrate a strong rental history. This is often referred to as a “rent as savings” policy. However, this isn’t a universal practice, and you should always check with your lender to understand their specific policies.
Is a deposit paid to a builder genuine savings?
Generally, a deposit paid to a builder isn’t considered as genuine savings because it doesn’t reflect your ongoing saving capacity. However, there are instances where some lenders may accept it as part of your overall deposit. Always clarify these aspects with your lender.
Can I get a home loan without genuine savings?
Yes, it’s possible to get a home loan without genuine savings. These are often known as “non-genuine savings home loans”. Some lenders may consider other forms of financial responsibility, such as a good rental payment history, as an alternative. However, these types of loans often have more stringent conditions, like a lower Loan to Value Ratio (LVR) and potentially higher interest rates.
Do lenders look through my savings account balance and transactions?
Yes, lenders usually look at your bank statements to understand your saving and spending patterns. This helps them assess your ability to make consistent loan repayments. They’re not just interested in the end balance, but how your money moves in and out of your account. They want to see that your savings are growing steadily over time.
Is there such thing as a non-genuine savings home loan?
Yes, some lenders offer non-genuine savings home loans. These products can be beneficial for those who may not meet the traditional genuine savings criteria. However, these loans can come with certain conditions or higher interest rates. It’s important to explore these options carefully to ensure they align with your financial goals and capabilities.
Can money in my offset account be considered genuine savings?
Yes, funds in an offset account linked to a residential property can be considered as genuine savings. This is because they represent regular saving habits and financial responsibility. An offset account is linked directly to a home loan, and the balance of the account is ‘offset’ against the home loan balance, reducing the interest payable. Regular deposits into this account can demonstrate a consistent saving pattern.
Conclusion
Understanding the concept of genuine savings is crucial in navigating the home loan process. It’s about proving financial discipline and the ability to maintain regular payments – a trait that’s attractive to lenders.
As a potential homebuyer, strive to build your genuine savings through smart budgeting, disciplined saving, and financial management. And remember, while genuine savings are crucial, they’re just one aspect of your overall financial picture. Lenders will also consider other factors like your income, credit history, and the property value when assessing your loan application.
Homeownership may seem daunting, but with the right knowledge and preparation, it becomes a lot more attainable. By understanding concepts like genuine savings, you’re arming yourself with the tools to make informed decisions on your journey to owning your dream home.
