What Are Genuine Savings for a Mortgage?
When you're planning to buy a home, one of the key factors lenders consider is whether you have genuine savings. But what exactly does this term mean, and why is it so important in the home loan approval process?
In this blog, we’ll explore what genuine savings are, why lenders value them, and how you can build up your savings to improve your chances of getting approved for a mortgage.
What Are Genuine Savings?
Genuine savings refer to funds that have been accumulated over time and are considered your own, as opposed to money that you may have received as a gift or a sudden windfall. Lenders use genuine savings to gauge your financial discipline and ability to manage your money effectively.
The main idea behind genuine savings is that they prove your ability to budget and save, which is an indicator of your readiness to handle mortgage repayments.
Typically, lenders look for genuine savings to cover at least 5% of the property purchase price.
What Qualifies as Genuine Savings?
Here are some examples of what lenders typically consider to be genuine savings:
Cash in a Savings Account: The most straightforward form of genuine savings is money that has been steadily built up in a savings account for at least three months. The key is that the money should have stayed in the account and not been deposited at the last minute.
Term Deposits: If you’ve placed your savings in a term deposit, and it's been there for an extended period (again, usually 3-6 months or more), this is typically viewed as genuine savings.
Equity in Existing Property: If you already own a property, the equity you’ve built up can be considered as genuine savings by some lenders.
Shares or Managed Funds: Some lenders will consider investments in shares or managed funds that have been held over a long period to be genuine savings, provided their value has grown and remained relatively stable.
What Doesn't Count as Genuine Savings?
Certain types of funds might not count as genuine savings, even if you use them for your home deposit. These include:
Gifts or Inheritance: While receiving a financial gift from a family member or an inheritance can help with your deposit, lenders usually don’t classify this as genuine savings because it wasn’t accumulated through your own efforts. If however these funds have been held in your account for at least 3 months, they can be considered genuine savings.
Tax Returns or Bonuses: Similarly, one-off payments like tax returns or work bonuses are not considered genuine savings, as they are seen as sudden, irregular income.
First Home Owner Grants (FHOG): While the First Home Owner Grant can be helpful, it’s also not considered genuine savings because it’s a government benefit rather than money you saved.
Why Are Genuine Savings So Important?
Lenders consider genuine savings as part of their risk assessment when they’re deciding whether to approve your home loan. Here are some reasons why they put such a high value on it:
Financial Discipline: Accumulating genuine savings shows that you have the financial discipline to live within your means, save regularly, and manage your money well. This reassures the lender that you're likely to manage your mortgage repayments responsibly.
Risk Reduction: Lenders see borrowers with genuine savings as lower-risk. If you’ve been able to save consistently, you’re more likely to handle the financial responsibility of a mortgage, even in challenging situations.
Higher Loan Approval Chances: If you can demonstrate genuine savings, you are more likely to get your mortgage application approved, even if you don’t have a huge deposit.
How to Build Up Genuine Savings
If you're just starting on your journey towards homeownership, building genuine savings can seem daunting. However, with careful planning, you can accumulate the funds needed to strengthen your mortgage application. Here are some steps to help you get started:
Create a Savings Plan: Set a target for how much you want to save, and break it down into manageable monthly or weekly goals. Automate your savings by setting up direct transfers to a dedicated savings account.
Stick to a Budget: Create a household budget to control your spending and ensure you’re living within your means. Avoid unnecessary purchases, and cut back on expenses wherever possible.
Monitor Your Spending: Use budgeting apps or tools to track where your money is going. Identifying areas where you can save more helps you boost your genuine savings faster.
Start Early: Since genuine savings must typically be held for 3-6 months, it’s crucial to start saving as early as possible, even before you’ve found your dream home.
Conclusion
Understanding what qualifies as genuine savings and why they matter is a vital part of preparing for your mortgage application. By demonstrating that you have the discipline to save consistently, you'll show lenders that you're ready to take on the financial commitment of a home loan. Start building your genuine savings early, and you’ll be in a stronger position when it comes time to apply for your mortgage.
If you need guidance on building your savings or navigating the mortgage process, the team at Rosh Partners is here to help. With over 20 years of experience, we can offer advice tailored to your specific situation, helping you achieve your goal of homeownership. Reach out to us today!
