Genuine Savings – Please Explain!
Genuine savings is a term bantered around a lot by the lending industry to define funds that have been genuinely saved over time for use as a deposit on a property purchase. Sounds simple enough but the confusing part is that often, many lenders and the mortgage insurers have different interpretations on what is and isn’t classed as genuine savings!
Firstly, why do you need genuine savings?
Well, almost all Australian lenders require that borrowers demonstrate the ability to be able to manage their money, and have been able to accumulate genuine savings of at least 5 % of the property purchase price when borrowing more than 80% of the value of a property (or 85% and above in some cases). Issues around genuine savings are one the most common reasons why high loan to value ratio (LVR) applications are declined. So, if you’re looking at making your loan application as strong as possible, and you are borrowing more than 80% of the property value, then genuine savings is something you can’t ignore.
Most lenders policies require home borrowers to have these genuine savings saved and held in their own bank account, and demonstrate these savings have accumulated over a 3-6-month period. This alone can be a huge challenge for many would-be home-buyers, especially those on low incomes and/or renting.
So, what is considered genuine savings?
Genuine savings criteria may differ slightly, depending on the lender. However, in general, the following are common:
- Savings held or accumulated over 3-6 month (depending on lender). The funds must be held in the name of at least one of the borrowers in a bank savings account for that period and must not at any time be less than 5% of the purchase price
- Term deposits held for 3 months or more
- Investments held for at least 3 months that can be converted to cash quickly (e.g. shares)
- Equity in real estate (varies depending on the lender)
- Some lenders may allow your rental history as a substitute for 5% genuine savings IF you can obtain the remaining 5% deposit from other means, however if these funds are borrowed, it goes towards liabilities and are assessed as such
And keep in mind:
- You must be able to clearly prove the history and source of genuine savings via acceptable documentation such as bank statements, shares certificates etc
- In addition to your genuine savings, you must have funds to cover stamp duty, lender’s mortgage insurance and any other associated purchase costs
The following are usually NOT classed as genuine savings:
- Gifts or an inheritance from family or friends
- Proceeds from a gambling prize (e.g. Tattslotto)
- Proceeds from the sale of a non-investment asset (e.g. car).
- Government grants (e.g. First Home Owners Grant)
A common mistake by borrowers is obtaining funds from family members, depositing this into their accounts and leave it sitting there for 3 months, then claim it as genuine savings without accumulating any additional savings over that period, whilst at the same time, commence making regular transfers to someone else’s bank account (repaying) soon after the initial
deposit!
Every lender has their own interpretation regarding genuine savings so the assistance
of an experienced broker can help with specific lender information and clarifying your options.
We can help, so if you would like further information on genuine savings and your particular borrowing situation
Call me on 0438 041 111 and I will be happy to discuss.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111