Navigating the path to buying your dream home or embarking on significant renovations requires more than just a desire; it necessitates a solid financial foundation. Among the critical elements in this journey is the concept of genuine savings. This guide is tailored for homebuyers and individuals looking to refinance for renovations in Australia, breaking down the essentials of genuine savings and how they can impact your mortgage approval process. For further professional advice, seek help from the top mortgage brokers in Sydney and Melbourne.
What Are Genuine Savings?
Genuine savings refer to funds that a borrower has saved or held over a period, typically three to six months, demonstrating financial discipline and stability. This is different to regular savings sitting in your bank account as well as non genuine savings which are funds that assist with purchasing a property, often which the borrower has not saved themselves. Lenders scrutinise these savings as part of the loan approval process to ensure borrowers have a buffer against future financial uncertainties. Examples of funds that are considered genuine savings include:
- Savings account balances
- Term deposits
- Shares or investment funds
- Proceeds from the sale of assets
Importantly, these funds must have been accumulated gradually over time to be considered genuine savings, highlighting your ability to save and manage money effectively.
Why Do Lenders Require Genuine Savings?
Lenders require genuine savings for several key reasons, all of which boil down to risk management and assessing the borrower’s financial responsibility. Let’s delve into why genuine savings are such a critical factor in the home loan deposit and approval process:
1. Evidence of Financial Discipline
Genuine savings are a tangible indicator of a borrower’s ability to manage their finances effectively. By consistently saving money over time, you demonstrate to lenders that you have the discipline to put aside a portion of your income.
This financial behaviour is crucial for meeting ongoing mortgage repayments, which is a significant concern for lenders. Non genuine savings, such as a cash gift from a relative towards the home loan, do not display financial discipline and do not assist you in showing the lender that you are able to buckle down and be disciplined when times get tough (as they will over the course of your home loan term).
2. Mitigating Risk
From a lender’s perspective, a loan is an investment, and like any investment, it comes with risk. By requiring genuine savings, lenders mitigate the risk associated with lending money. Borrowers who have managed to save a substantial amount are deemed less likely to default on their loans, as they have shown they can manage their money and have a cushion to fall back on in financial emergencies.
Every lender has their own genuine savings policy and also has different requirements for what they count as genuine savings, Speak to a mortgage broker before making any financial decisions. An example of this is that some lenders will allow your rent count as genuine savings.
3. Assessing Financial Health
Genuine savings give lenders insight into a borrower’s broader financial health. It’s not just about having the funds available for a deposit; it’s about showing that you can sustain a saving pattern amidst other financial obligations. This ability is crucial, especially when considering the additional costs associated with owning a home, such as insurance, rates, and maintenance.
4. Reducing Dependency on Borrowed Funds
Lenders want to see that borrowers are not entirely reliant on borrowed funds for their deposits. A full reliance on loans for the deposit increases the total amount borrowed, elevating the lender’s risk and potentially straining the borrower’s financial resources during the home loan period.
Genuine savings reduce this reliance, indicating that the borrower is investing their own money into the property, which aligns their interests with those of the home loan provider/lender.
5. Compliance with Insurance Policies
For a home loan where the borrower’s deposit is less than 20% of the property’s value, Lenders Mortgage Insurance (LMI) is typically required. Insurers may mandate genuine savings as part of their criteria for providing coverage.
This requirement ensures that the borrower has ‘skin in the game’ and is less likely to default on the home loan, which in turn protects both the lender and the insurer.
6. Enhancing Home Loan Approval Chances
Demonstrating genuine savings improves a borrower’s profile and increases their chances of loan approval. Lenders are more inclined to approve applicants who present less risk and have shown financial prudence through genuine savings.
This aspect is particularly crucial in a competitive housing market, where many potential buyers are vying for approval on desirable properties.
How Much Genuine Savings Do You Need?
The amount needed for genuine savings varies by lender and the specific loan product. However, a common benchmark is that lenders require at least 5% of the purchase price of the property to come from genuine savings. This requirement can depend on various factors, including the total loan amount, the type of property being purchased, and the borrower’s overall financial situation.
The 5% Rule
For many lenders, the magic number is 5% of the property’s purchase price. If you’re looking to buy a home for $500,000, for example, you’d need to show at least $25,000 in genuine savings. This figure demonstrates to lenders that you have the discipline and capability to save money over time, beyond just accumulating funds for the purchase.
Beyond the 5%
While 5% is a standard minimum, having more than the minimum in genuine savings can positively impact your loan application. Larger amounts of genuine savings can lead to better interest rates, lower fees, and potentially access to more favourable loan products.
It can also influence the lender’s decision regarding Lenders Mortgage Insurance (LMI) if your deposit is less than 20% of the purchase price and make the chances of an approval less likely if you do not meet the requirements of the LMI provider.
Specific Lender Requirements
It’s important to note that specific lender requirements can vary. Some lenders may have higher genuine savings requirements, while others may be more flexible, especially if the borrower demonstrates strong financial stability in other areas.
Additionally, certain lenders might accept non-traditional forms of genuine savings or have unique criteria for what constitutes genuine savings, such as rent payments (discussed earlier).
Prospective borrowers should prepare by researching lenders’ requirements well in advance of applying for a mortgage. This preparation includes understanding how each lender defines genuine savings, their genuine savings policies, and what documentation will be needed to prove genuine savings.
Engaging a mortgage broker can also provide insights and advice tailored to your financial situation, helping you navigate the genuine savings requirements effectively.
Enhancing Your Genuine Savings
Boosting your genuine savings is not only about meeting lender requirements; it’s about building a solid financial foundation for your future home. Here are some strategies to enhance your genuine savings:
- Set up a dedicated savings account: This makes it easier to track your progress and prevents you from dipping into your savings for everyday expenses. A high interest savings account is always a good option.
- Automate your savings: Setting up automatic transfers to your savings account can help you save consistently without having to think about it.
- Cut unnecessary expenses: Review your spending habits and identify areas where you can cut back to boost your savings.
- Increase your income: Consider taking on extra work or selling unwanted items to add to your savings.
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The Impact of Genuine Savings on Your Mortgage Application
Having sufficient genuine savings can significantly enhance your mortgage application in several ways:
- Better loan terms: Lenders may offer you better interest rates or more favourable terms if you demonstrate strong financial discipline through genuine savings.
- Lower Lenders Mortgage Insurance (LMI): If your deposit is less than 20% of the property’s value, you’ll typically need to pay LMI. However, a strong, genuine savings record can sometimes reduce the LMI premium.
- Increased borrowing power: Demonstrating the ability to save consistently can increase the amount lenders are willing to loan you, as it reduces their perceived risk.
Closing Thoughts
Understanding and accumulating genuine savings is a crucial step for anyone looking to buy a home or finance renovations in Australia. It not only satisfies lender requirements but also positions you as a financially responsible borrower, potentially leading to better loan conditions.
Start focusing on your genuine savings today to pave the way for a smoother, more successful path to homeownership or your next big renovation project.
Remember, the journey to buying a home or undertaking significant renovations is a marathon, not a sprint. Patience, discipline, and a clear understanding of genuine savings will be your best allies in achieving your property goals.
FAQs
Genuine savings refer to funds that have been gradually accumulated over time, demonstrating consistent saving habits. These typically include savings from regular income, term deposits, and equity in existing property, showing financial discipline and reliability to lenders.
Genuine savings are important because they demonstrate your ability to manage money responsibly. Lenders view genuine savings as a sign of financial stability and a lower risk, increasing your chances of securing a home loan.
Qualifying genuine savings typically include funds held in a savings account for at least three months, term deposits, equity in existing property, and sometimes shares or managed funds. Regular savings patterns are key to meeting lender criteria.
To prove genuine savings, you need to provide bank statements showing consistent savings over a specified period (usually three to six months). These statements should clearly indicate the accumulation of funds from regular income.
Generally, gifts and bonuses are not considered genuine savings as they do not demonstrate consistent saving behavior. However, some lenders may consider them if they have been held in a savings account for a certain period.
Most lenders require a history of genuine savings over at least three months. This period demonstrates your ability to save regularly and manage your finances effectively, which is crucial for loan approval.
Alternatives to genuine savings include guarantor loans, government grants or incentives, and using non-genuine savings such as gifts or tax refunds. However, these alternatives may come with additional requirements or restrictions.
The benefits of having genuine savings include improved chances of loan approval, potentially better interest rates, and demonstrating financial discipline. Genuine savings indicate to lenders that you are a lower-risk borrower.
Some lenders may consider consistent rental payments as genuine savings, particularly for first-time homebuyers. Providing a rental ledger or bank statements showing regular rent payments can support your loan application.
To start building genuine savings, create a budget, set a savings goal, and establish a regular savings plan. Automating your savings and reducing unnecessary expenses can help you accumulate funds consistently over time.
MANSOUR SOLTANI
Mansour has spent more than two decades involved in the purchase and sale of real estate, acquiring both investment and commercial properties throughout Australia, including in major cities and smaller regional locations.
He is the proprietor of a finance brokerage firm, overseeing a portfolio worth in excess of 75 million in loans and serving a diverse clientele across Australia and a regular contributor to money.com.au. This has equipped him with extensive knowledge in various investment tactics, allowing him to offer significant insight.
