Genuine Savings In Home Loan Application
Genuine savings is a requirement to prove to lenders that you have consistently been saving before making a loan application. Having a deposit isn’t enough these days to get a loan approved – many lenders also want to see evidence that this has been ‘genuinely’ saved. This means that property buyers can find that their loan application is rejected if their deposit is a gift from their parents or family members or from some other one-off source, such as a bonus from work or a tax refund from the ATO.
This post covers the ins and outs of genuine savings and non genuine savings and how it impacts your loan application. Read below to find out:
- What is genuine savings and what is non genuine savings?
- When do banks need to see genuine savings?
- No genuine savings home loan success story
- Difference between non genuine savings home loan and no deposit loan
- How to prove genuine savings
- How to calculate genuine savings
- How can I get a loan if I don’t have enough genuine savings?
- Why do banks need to see genuine savings?
- Strategies for building up genuine savings
- Key takeaways about genuine savings and non genuine savings
1. What is genuine savings and what is non genuine savings?
Lenders with a genuine savings policy require you to prove that you have saved at least 5 per cent of the purchase price of the property in the last three months to approve your mortgage application. Even if borrowers have a sufficient deposit, a bank with a genuine savings policy will still decline a loan application if it does not meet their genuine savings requirement.
Borrowers need to show they have been consistently building up their deposit and have had at least 5% of their purchase price in a savings account for a minimum of 90 days (3 months), rather than just one-off lump sums.
Proving genuine savings isn’t just limited to savings in a transaction account – it can also include:
- Savings in a term deposit account;
- Listed shares and managed fund purchases; and
- Building equity in an existing property.
One-off payments, often referred to as non genuine savings, are disregarded by banks from a genuine savings calculation and can include:
- Gifts and inheritances
- Bonuses from work
- Advances on wages
- Refunds of tax from the ATO
- Proceeds from sale of a non-investment asset (such as a car)
- Other borrowings such as personal loans
- Windfall gains such as gambling winnings
- Builder discounts, rebates or incentives
- Government grants such as the first home owner’s grant (FHOG)
- Future or projected earnings or deposits
It is important to note that different banks may have different definitions of what they consider to be a genuine or non genuine savings. As well, some lenders may require proof of six months of genuine savings rather than only three months.
Contact us on 1300 138 943 to speak to a lending specialist and find out how lenders’ genuine savings policies differ.
2. When do banks need to see genuine savings
Whilst all lenders have different policies, the rule of thumb is that the higher the loan-to-value ratio (LVR) of the loan, the more likely you will need to satisfy a genuine savings policy.
Most lenders will not require you to show genuine savings if you have at least a 20% deposit (or 80% LVR loan). However almost all lenders will require you to prove genuine savings if you only have a 5% deposit (or 95% LVR loan). Some banks may even require proof for 85% or 90% LVR loans.
However certain lenders will not require proof of genuine savings even for high LVR loans. These lenders have a non genuine savings policy or no genuine savings home loans. This means that they may take into account other factors to approve your loan, instead of genuine savings, such as:
- Proof of on-time rental payment history;
- Stable employment history; and/or
- A good credit score.
Borrowers should be aware that no genuine savings home loans can often come with a catch including:
- More restrictions on properties you can buy. Some types of properties may be blacklisted such as high density or regional properties;
- Limits on the purpose of your loan i.e. owner occupier and not investment loan, especially in the case of 95% LVR loans; and/or
- Reduction to your borrowing capacity.
Also because a non genuine savings home loan is usually also a high LVR/low deposit loan, there may also be other pitfalls such as:
- Paying lender’s mortgage insurance or LMI; and/or
- Higher interest rates.
Contact us on 1300 138 943 to find out whether a no genuine savings home loan is suitable for your circumstances.
3. No genuine savings home loan success story
No genuine savings home loans can be useful to allow first home buyers to avoid missing out on their dream property.
For example, Mortgage Corp helped one of our first home buyer clients, a young retail manager, buy and move into her dream first home with a no genuine savings home loan. A Big 4 bank had previously declined her loan application because they had a genuine savings policy which meant her deposit which was mostly a gift from her parents was not enough. However Mortgage Corp was able to find our client the right lender that was able to approve her no genuine savings home loan. Read this Non Genuine Savings Home Loan Success Story.
However it’s not just first home buyers who can access a non genuine savings home loan – all types of property buyers can apply for one including property investors and multiple property owners. However property investors often have other options such as accessing existing equity to increase their deposit amount, so they may not need to rely on a lender’s non genuine savings policy.
4. Difference between no genuine savings home loan and no deposit loan
We often get asked the question: what is the difference between a no genuine savings home loan and a no deposit loan?
A no deposit loan allows a purchaser to borrow 100% of a property’s purchase price, sometimes even plus fees. Borrowers who would rather not to pay any money out of their own pocket may want to consider a no deposit loan instead of a non genuine savings home loan. This is because most banks will only lend up to 95% LVR (i.e. require a 5% deposit) for a no genuine savings home loan. Remember also that even if a bank lends you 95% of the purchase price, you will also need more than just 5% of your own money as there’s also LMI, stamp duty, legal fees and disbursements such as council, water and body corporate rates to consider. To work out how much more you might need to pay out of your own pocket, use our Comprehensive Mortgage Calculator.
A bank will only offer a no deposit loan in limited situations. One common situation is where a buyer has existing equity in another property. For example, Mortgage Corp helped one of our multiple property investor clients obtain a no deposit loan and buy his fourth investment property by accessing the equity in his existing homes through cross-collateralising all of his properties. You can read more about our no deposit home loan success story here.
Another common way to access a no deposit loan is through a family guarantee or guarantor loan. A family guarantee means a family member, usually your parents, agree to secure your loan by placing a security on a home they own. You can read more about our first home buyer zero deposit family guarantee loans success story here.
It is important for borrowers to understand the difference between non genuine savings home loans and no deposit loans as they have different lending criteria and advantages and disadvantages. One of these options may be more suitable for you than the other. To discuss with a lending expert which strategy may suit you, contact us on 1300 138 943.
5. How to prove genuine savings
It can be difficult to work out what banks mean when they say they need proof of genuine savings.
First of all, borrowers need to provide sufficient evidence of their genuine savings at the time of applying for a loan, making sure at a minimum that:
- Genuine savings are held in their name or at least one of the borrowers’ names; and
- They can provide verified statements and/or other documents proving their genuine savings.
Savings held in someone else’s name or in a joint account involving a person that is not a borrower may not be accepted by some banks. If savings are held in a trust or company bank account then more extensive documentation may be required to prove the money is actually yours.
The next step is to work out what exactly banks are looking for in those statements and documents.
For example, if a bank has a genuine savings policy of 5% over the last 3 months and you are planning to purchase a property for $500,000, you will need at least $25,000 in savings.
For some lenders, it is fine if you have $25,000 in your savings account at the time of your loan application, provided you can show regular savings and a steady increase in your savings balance in the last 3 months. Other lenders however may need to see $25,000 as the minimum balance for the 3 month period before your loan application.
However a bank may question or deduct amounts from your genuine savings if your statements show that:
- Your savings are irregular;
- There are lump sum deposits that are not held for more than 3 months at the time of your loan application;
- There are lump sum withdrawals; and/or
- Your savings balance is decreasing rather than increasing.
6. How to calculate genuine savings
To illustrate how genuine savings are calculated, imagine you need a loan on 1 May and have provided bank statements since February. You are planning to purchase a property worth $500,000 and need to prove that you have had a minimum of $25,000 in savings over the last three months.
Your bank statements are showing three deposits in the last three months:
- A deposit of $1,100 on 3 February
- A deposit of $900 on 3 March
- A deposit of $850 on 3 April
As a regular contribution is being made every month then these amounts could be considered to be regular savings depending on the lender’s policy. However a bank will still look at where the deposits came from – for example, if they are gifts from family members then they will still not be considered to be genuine savings. A bank may find out by investigating the bank account details where the funds came from.
Now imagine there was a 4th deposit of $5,000 made on 29 April 2017. A bank is likely to consider this amount to be a lump sum deposit rather than regular savings. This means that they will reduce your genuine savings amount by the $5,000 deposit as it has not been held for more than 3 months. If your bank statements are showing that you only have $25,000, the $5,000 reduction will bring your genuine savings down to $20,000, which is not enough for the bank to approve your loan as at 1 May.
It is therefore extremely important to make sure your bank statements can show a pattern of consistent savings, which is not disrupted by any lump sum deposits or withdrawals. One way to do this is to make sure all of your savings is in a separate account from your transaction account so that your pattern of genuine savings is not derailed by any one-off spending or savings.
For example, say you have $25,000 in savings but during the last three months:
- There was a deposit of $5,000 into your account from your parents to help you pay for a new kitchen renovation
- A few days later, there was a $5,000 withdrawal from that account when you went to pay for the renovation
Even if you had regular savings in the last three months, a bank may treat the $5,000 deposit as a non genuine savings, even though you immediately withdrew it. This would mean you would be treated as only having $20,000 in genuine savings as the bank cannot take into account the $5,000. It would have been better if this transaction wasn’t in your statements so the bank wouldn’t arrive at this conclusion.
If you do have lump sum deposits or withdrawals in your account, you might want to:
- Gather further documentation to prove the lump sums are actually genuine savings e.g. savings transferred from another account in a lump sum; or
- Wait another couple of months to apply for your home loan until your lump sums fulfil the genuine savings time requirement or if you expect further savings in the near future.
If you would like to understand further how lenders calculate genuine savings contact us on 1300 138 943 to speak to a lending specialist.
7. Why do banks need to see genuine savings?
Lenders are getting tougher on lending requirements to make sure they manage their risk as lenders are speculating that they may have already over exposed themselves to potential downturns in the property market. A genuine savings policy allows a bank to make sure that you are living within your means and able to make repayments on a high LVR/low deposit loan. Proving genuine savings over a period of time, usually three months, provides lenders with comfort that you will be able to service your loan. However your capacity to repay a loan is just one factor as lenders look at all of the ‘5 C’s of credit’ when assessing your loan application: character, collateral, capacity, capital and conditions. Almost all lenders including the four big banks use these 5 key criteria when assess a loan, be it a home loan or investment loan.
Another reason banks have genuine savings policies is because their lenders’ mortgage insurance or LMI insurers require it as a term of their insurance policy. As a genuine savings loan is usually 85% or more LVR, this means it will normally attract LMI (which generally applies for loans greater than 80% LVR). If you default on your loan, LMI covers the lender/bank against loss should this happen. Certain LMI insurers will only allow banks to claim for this loss if they made sure at least 5% of your savings were genuine savings when you applied for your loan.
8. Strategies for building up genuine savings
As explained above, proving genuine savings isn’t just about showing you have 5% of the purchase price in your bank statements – you need to also show a consistent pattern of savings over the last three months before your purchase your home.
It is therefore essential to:
- Set up a regular contributions schedule at least 3 months before you plan to buy a property. Ideally, it is advisable to start saving regularly even earlier i.e. before you apply for a home loan to ensure your finance is sorted before you starting looking at homes to avoid disappointment
- Consider setting up a direct debit into your savings account
- Ensure lump sum withdrawals and deposits go through your normal transactions account rather than your savings account
- Set aside enough to ensure you reach at least 5% of the purchase price by budgeting. Our Budget Planner Tool takes a comprehensive look at your income and living expenses to identify opportunities for saving to meet the genuine savings target. This is also an opportunity to assess whether you will be able to meet repayments on your home loan
9. How can I get a loan if I don’t have enough genuine savings?
If you cannot prove to a bank that you have sufficient genuine savings, it is not the end of the world. There are a number of strategies available to you including:
- Providing further documentation explaining you have genuine savings
- Allowing a good mortgage broker to find the right lender for you with a no genuine savings policy
- No deposit loans either through accessing existing equity or a family guarantee
- Waiting a few extra months to purchase your property and to ensure any lump sum deposits can be converted to genuine savings
- Budgeting and making regular contributions to your savings account
A Mortgage Corp lending specialist may also be able to help you identify other strategies to achieve the loan you need such as restructuring your home loans, finding a different lender or consolidating your credit facilities. Request a Free Loan Structuring Strategy Session to explore what loan options are available to you.
10. Key takeaways about genuine savings and non genuine savings
- Not all loans and lenders need proof of genuine savings – however those that do typically require you to show that you have saved at least 5% of the purchase price over the last three months.
- Non genuine savings includes one-off receipts such as gifts, bonuses, windfalls and proceeds from sale of assets such as cars.
- Almost all lenders will require you to prove genuine savings if you only have a 5% deposit (or 95% LVR loan). Some banks may even require proof for 85% or 90% LVR loans.
- Some lenders offer no genuine savings for high LVR loans where instead of showing genuine savings, they will accept rental history, stable employment history and good credit score as proof of your ability to service the loan.
- You still need at least 5% deposit for a no genuine savings home loan, plus fees such as LMI, stamp duty and legal fees. If you want approval for a no deposit loan you will generally either need access to equity in a property you already own or a family guarantee.
- Lenders want to see a consistent pattern of savings. Evidence of lump sum withdrawals and deposits and irregular savings in your bank statement can derail your genuine savings history.
- Make sure you schedule regular savings and budget appropriately to reach the 5% savings target by the time you purchase the property.
- Insufficient genuine savings is not the end of the world. A lender also looks at factors other than your ability to service your loan when approving your application. A Mortgage Corp lending specialist can help you assess your situation and identify strategies to achieve the loan you need.
Ultimately different lenders will have different policies for different loans and there is no one size fits all solution. A Mortgage Corp lending specialist can help you work through different lenders’ requirements and find the loan and lender that best suits your needs and circumstances. Whether you are a first home buyer or an experienced investor, take advantage of our Free Loan Structuring Strategy Session today and let us guide you to not only getting a loan but building a solid property portfolio.
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only few MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.
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Based in Wantirna South, Melbourne (opposite the Westfield Knox Shopping Centre), Mortgage Corp is the most loved mortgage broking firm in Melbourne with consistent 5 star customer reviews. Mortgage Corp specialises in helping successful professionals and property investors maximise their return and strategically structure your loan for long term investment success.
Unlike most mortgage brokers that may be able to help you with general loans but simply don’t have the skills, experience or resources to genuinely help home buyers and property investors maximise long-term wealth, Mortgage Corp take a long-term, strategic approach to help our clients maximise their overall investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!