All You Need to Know About Genuine Savings
The dream of owning a home often rests on securing a mortgage, however, this isn’t as easy as it may sound. Aspiring homeowners in Australia navigate a complex landscape of financial prerequisites, and one of the most critical aspects is the concept of genuine savings. Understanding this term and its implications can significantly impact your ability to secure a home loan.
In this comprehensive guide, we will explain what the term genuine savings means plus its importance in the mortgage application process. We will also discuss various examples and alternatives to this option to help you make an informed decision on your journey to homeownership.
Definition of Genuine Savings
“Genuine savings” is defined as true savings that a borrower has saved over time from their own income. These funds must have been built up over the course of the past three months for them to be considered genuine savings for a home loan. To explain further, here are a few things to remember about it:
Savings Accumulated Gradually
Genuine savings are essentially funds that have been accumulated gradually by the borrower. These funds are typically the result of consistent saving habits over time. It’s essential to show that you can responsibly manage your finances by setting aside money from your income for future investments like purchasing a home.
Length of Ownership
To qualify as genuine savings, the funds must have been in the borrower’s name for an extended period, typically at least three months. This demonstrates a stable and responsible financial history, indicating that you’re capable of managing your finances over an extended period. It’s a crucial factor that lenders consider when evaluating your loan application.
Distinguishing from Regular Savings
It’s important to differentiate genuine savings from regular savings. Regular savings can include one-off windfalls, such as bonuses, gifts, or proceeds from asset sales. While these funds can be helpful for various purposes, they may not be considered genuine savings for the purposes of a home loan application. Lenders are primarily interested in your ability to consistently save and manage your finances over an extended period.
How Much Savings Do I Need to Buy a House?
The amount of savings you need to buy a house in Australia can vary widely depending on several factors, including the location and the price of the property you’re interested in, the size of your deposit, and the specific requirements of the lender.
In Australia, a common guideline is to aim for a 20% deposit. For example, if you’re considering a property valued at $500,000, a 20% deposit would amount to $100,000. However, this isn’t a fixed requirement, and some lenders may accept deposits as low as 5% or 10%. Apart from this, a minimum of 5% of the purchase price must be shown as genuine savings. You should also keep in mind that a smaller deposit may result in higher interest rates and the need for LMI.
Can I Buy a House Without Genuine Savings?
While having such an asset can significantly improve your chances of securing a home loan, it is possible to buy a house without it. As mentioned earlier, alternatives like using your rental payment history as evidence or seeking a guarantor can help you secure a home loan without this requirement.
It’s also worth exploring lenders that offer loans specifically designed for those without substantial funds in savings but with strong financial profiles. To gauge your borrowing capacity, these lenders may focus on factors such as your income, credit history, and overall financial stability rather than the presence of genuine savings.
Importance of Genuine Savings
What’s so important about genuine savings when it comes to homeownership? Here are some reasons why:
Assessing Savings Habits
Lenders use it as a measure to assess your savings habits. Demonstrating a history of saving and managing your finances responsibly can provide them with confidence in your ability to handle mortgage repayments. This evaluation is crucial, as it helps lenders determine whether you are a low-risk borrower.
Managing Home Loan Repayments
Genuine savings also serve as an indicator of your capacity to manage home loan repayments. By consistently saving over an extended period, you showcase your financial discipline, making you a more attractive candidate for a home loan. Lenders want to ensure that you can meet your financial obligations without defaulting on the loan.
Home Loan Application Approval
Perhaps the most critical aspect of genuine savings is their role in the approval of your home loan application. Without a proven history of responsible saving, your chances of securing a mortgage could be significantly reduced. This factor reassures lenders of your financial stability and your commitment to the investment, increasing the likelihood of a successful application.
Examples of Genuine Savings
Now that we’ve established the importance of genuine savings, let’s explore the various forms they can take:
Savings Held for Three Months or More
Traditional savings accounts that have accumulated funds over at least three months fall under this category. These accounts reflect your ability to save consistently over time, a quality that lenders highly value.
Term Deposits Lasting More than Three Months
Term deposits are another excellent example of this home loan requirement. By locking your money away for a predetermined period, you demonstrate your commitment to saving and financial responsibility.
Shares or Managed Funds Held for at Least Three Months
Investing in shares or managed funds and holding them for a minimum of three months can be considered genuine savings. This demonstrates your ability to allocate your funds wisely and manage investments over time.r
Funds from the First Home Super Saver Scheme
The First Home Super Saver Scheme (FHSSS) is a government initiative designed to help first-time home buyers save for a deposit through their superannuation fund. The contributions made to your Super can count as genuine savings.
Equity in Current Property
If you already own property, the equity you’ve built up in that property can be considered genuine savings when you’re looking to purchase another. Lenders often look favourably at applicants who can leverage the equity in their existing property to secure a new one.
What Aren’t Considered Genuine Savings
Understanding what doesn’t qualify as genuine savings is equally important. Here are some sources of funds that don’t count:
Gifts or Inheritances
While gifts or inheritances can provide a financial boost, they are generally not considered genuine savings since they are one-time windfalls rather than the result of consistent saving habits.
Asset Sales (e.g., Selling a Car)
Proceeds from selling assets like a car are also not considered. These are often lump sum amounts that do not reflect a history of saving.
Tax Refunds
Tax refunds, although a welcome addition to your finances, are not considered genuine savings. They are typically irregular and depend on various factors, such as your income and deductions.
Work Bonuses
Work bonuses, even if substantial, are typically excluded from this category. They are one-time payments and do not demonstrate consistent saving habits.
The First Home Owners Grant
The First Home Owners Grant (FHOG) can provide financial assistance to first-time home buyers, but it is not considered genuine savings. It is a government incentive designed to make homeownership more accessible.
Short-Term Savings (Less than 3 Months)
Savings held for less than three months generally do not qualify. Lenders prefer to see a more extended history of consistent saving.
To help you further understand what genuine savings are, here’s a video that can explain it to you.
Options When Lacking Genuine Savings
If you find yourself lacking this factor for home buying but are still eager to embark on your homeownership journey, there are alternative strategies to consider:
Using Rental Payment History as Evidence
Did you know that using rent as genuine savings to show your ability to meet regular financial commitments is also possible? Rent as genuine savings is one avenue a lot of first-home buyers take when they don’t have enough money saved up for a deposit. Consistently paying rent on time demonstrates financial responsibility, which can be appealing to lenders.
Seeking a Guarantor for the Loan
Another option is to seek a guarantor for your home loan. A guarantor is someone who agrees to take responsibility for your loan if you default on payments.
Finding Loans that Don’t Require Genuine Savings
Some lenders offer loans that focus on proof of stable income and timely bill payments. These loans may have different eligibility criteria, so it’s essential to research and compare your options carefully.
ZEP Finance is Here to Help with Your First Home Purchase
Whether you choose to use your rental history as genuine savings, seek a guarantor, or explore lenders that don’t think this is necessary, there are paths to homeownership for everyone. With the help of mortgage brokers here at ZEP Finance, you can embark on your homeownership journey with confidence.
We know that there are multiple avenues to make your dream of owning a home a reality, with or without genuine savings, and we can help you get there. Contact us today to find out what these avenues are.
