Most first home buyers will typically need to borrow more than 80% of a property’s purchase price to get into the market. If you have a deposit of less than 20% you may need to pay Lenders Mortgage Insurance (LMI). One factor that the bank and the LMI provider may look at is the amount of ‘genuine savings’ you have.
Why are genuine savings important?
Demonstrating to a lender that you have been able to establish a regular savings pattern will give them comfort that you have surplus cash flow. That is, you do not spend all your income and you have enough money to use towards loan repayments after you buy a property. That makes a lender comfortable that you can afford it.
Conversely, if you have not been able to accumulate any savings, then a lender will question whether you can afford to take on a loan commitment.
When are genuine savings required?
Typically, if you would like to borrow 90% or more of a property’s value, you will have to demonstrate that you have at least 5% of the property’s value in genuine savings. If you want to borrow more than 80% but less than 90%, the borrower usually does not need to demonstrate genuine savings.
Who wants to know whether your savings are ‘genuine’?
When borrowing more than 80% of a property’s value, two parties must approve your application – the lender and the LMI provider. Sometimes the bank has the authority to approve an application on behalf of the LMI provider, which makes things simpler.
There are only two LMI providers in Australia – QBE and Genworth. A lender will typically only use one of these providers. Their credit policies are relatively similar, but can differ at times, which is important to understand.
What is included in genuine savings?
Genuine savings can be derived from one or a combination of sources including:
- Money accumulated or held in a bank account in your name for a period of at least three months.
- Funds withdrawn from your superannuation account under the government’s First Home Super Saver Scheme.
- Term deposits and/or shares held for a period of at least three months.
- Proceeds from the sale of investments such as shares, as long as you can demonstrate you held those investments for more than three months.
- Consistent accelerated loan repayments over a period of at least three months. For example, if you had a personal loan and you were making extra repayments (i.e. repayments above the minimum) equal to $200 per week over the past three months, then that may be counted towards genuine savings.
- Equity held in residential property or proceeds from the sale of property.
- If you are borrowing to purchase an owner-occupier home and are currently renting, the LMI provider and lender may take into account the amount of rent you are paying when determining your genuine savings. LMI providers will typically require confirmation of an unblemished rental payment history of between three and six months.
What is excluded from genuine savings?
The sources below are typically not included as genuine savings:
- Gifts, windfall gains and inheritances. These lump sum benefits are excluded from genuine savings unless they have been held in a bank account in your name for a period of at least three months. After three months though they will typically be included as genuine savings.
- The sale of assets other than property and investments such as the sale of a car.
- The First Home Owner Grant (which typically only applies to the purchase or construction of new homes).
- Money held in business or company bank accounts.
- Unsecured borrowings such as personal loans.
- Builder and Vendor rebates or incentives.
Are COVID-19 super withdrawals considered genuine savings?
The government has permitted Australians to obtain early access to their superannuation if they have been adversely impacted by COVID-19.
To be eligible for this withdrawal one of the following circumstances must apply:
- you are unemployed
- you are eligible for certain government payments such as JobSeeker
- you were made redundant in 2020 or had your working hours reduced by more than 20%.
Whilst withdrawing money from super may allow you to boost your housing deposit, the circumstances that let you withdraw the money may impair your ability to obtain a loan. For example if you’re unemployed, you can’t expect a bank to approve your loan application.
If you hold onto the funds withdrawn from super in a savings account in your name for over three months though, then this amount may be considered genuine savings. And, if over this time your employment situation and income improve it may increase your chances of qualifying for a loan.
Tips to help you save as much as possible
It may be stating the obvious but the best way to save as much money as possible is to maximise your income and minimise your expenses. Expense management is often the more challenging aspect of this.
It’s hard to manage something that you do not measure. That’s why it’s a good idea to have a process for measuring expenses. This can be done in several ways – pick the one that suits you best.
One option is to use a free spend-tracking app such as Pocketbook. It will download your transactions from your bank account and allocate these in certain categories. You can then set a budget for each category and receive an alert when you have reached your limit.
Another approach is to use two separate bank accounts. The first bank account receives all your income (salary) and you only pay non-discretionary expenses from this account such as utility bills, rent, loan repayments, insurance, etc.
The second account is used for discretionary expenses such as shopping, groceries, eating out, entertainment, etc. You’ll need to establish a regular transfer from the first (non-discretionary) account to the second account.
For example, you might transfer $1,000 per fortnight into the discretionary account. You then know if the bank balance is close to zero after only a few days into the fortnight, you are overspending, and you can correct your behaviour. This approach means that you track spending at a high level, and therefore don’t need to track every dollar and cent.
Different lenders have different credit policies and use different LMI providers so it may be helpful to speak to a few lenders or consult a mortgage broker to identify which one best suits your circumstances.
About Stuart Wemyss
Stuart Wemyss is a Melbourne-based financial adviser who has over 20 years’ financial services experience. Stuart is a Chartered Accountant and is licensed to provide credit, tax, insurance and financial advice. He is also author of Rules of the Lending Game (Major Street Publishing $29.95).
Main image source: interstid (Shutterstock)
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