Dipping a toe into the property market when you’re a first home buyer can be a learning curve on a number of fronts. First home buyers (FHBs) often find lender policies confusing when trying to understand exactly what they need to do to meet the requirements.
The concept of genuine savings is one area that can be confusing – and it doesn’t help that each lender tends to have their own policy.
Now, you’re probably thinking “but surely savings are savings?” Right? Well… not necessarily. As part of a lender’s assessment of your suitability as a ‘good borrower’ they require evidence of your ability to plan and save for a deposit yourself.
Definition of Genuine Savings
This term is used by lenders to define the amount of funds a home loan applicant has ‘genuinely’ saved over time. Requirements may differ depending on the total amount you borrow. For instance if you have:
- 20% deposit – then proof of genuine savings is not required
- 15% deposit – genuine savings are not required by most lenders
- 10% deposit – most lenders require genuine savings
- 5% deposit – all lenders require genuine savings
What are considered genuine savings?
The following are generally considered genuine savings if they add up to more than 5% of the purchase price (10% if you are an investor):
- savings held or accumulated over 3 months
- term deposits, shares or managed funds held for 3 months
- equity in real estate (this can vary between lenders)
Some lenders require a 6 month savings history. If you have been renting for over 3 months there may be some exceptions to the above.
Of course, you can pay more than the minimum deposit – and the remainder of your deposit may come from any source – as long as you have met the lender’s genuine savings criteria for 5% of the purchase price, eg if buying a $600,000 home you will need to show $30,000 in genuine savings.
What DOESN’T count?
It’s often the source of funds that DON’T count that catch FHBs by surprise! The following are NOT considered genuine savings:
- cash gifts
- tax refunds
- savings plans
- selling your car or other assets
- First Home Owner Grant (FHOG)
- funds held in a business account
- borrowed funds, eg personal loan
- lump sum deposits (funds from sale of property is an exception)
- developer/builder rebates or incentives
The power of rental history!
If you have a strong rental history some lenders may make an exception and consider other sources, eg a gifted deposit from parents.
However there WILL be criteria you will have to meet and your rental history will have to be proven.
If you’re a renter considering future property ownership it pays to know what lenders look for as part of their ‘rent exception’ assessment. At the time of your loan application the home loan applicant(s) must:
- be currently renting
- have a minimum 6 months of satisfactory rental history and on time payments
- be listed as tenants on the lease
- be renting via a licensed property agent or privately (NB: private rentals may be assessed on a case by case basis)
But don’t think renting will make it easy! Lenders will be stricter if there are no genuine savings in a bank account – they will analyse how you manage your money through your savings and spending history. Even if they assess rent as genuine savings you will still need to prove you have the deposit (or ‘funds to complete’) at the time of your application.
The most essential tip?
Make sure you are loan application ready BEFORE you apply! As your finance specialist we have extensive experience across a range of lenders – we will do the legwork for you!
The earlier you contact us on your path to home ownership – the earlier we can assess your current situation and provide guidance on how to get you to where you want to be!
Disclaimer: This article is generic in nature. All finance and investment decisions should be considered wisely and based on your personal and financial circumstances. Seek proper advice before committing to any course of investment action. This is not deemed as advice.