The ability to save money plays a big part in applying for a home loan, not only to provide sufficient funds for the deposit but to demonstrate that you can meet the repayments down the track.
The ability to save money plays a big part in applying for a home loan, not only to provide sufficient funds for the deposit but to demonstrate that you can meet the repayments down the track.Even if someone is giving you a gift to help with the costs upfront for the purchase, genuine savings has a purpose of proving that you are responsible with your money and have sufficient left over after your living expenses to manage the mortgage repayments.
What are genuine savings?
Lenders have a specific definition of how they evidence genuine savings. It has to add to a percentage of the purchase price (usually 5%) that has been saved over a certain time period. Three months savings statements will be required to demonstrate this amount building up and being held in an account in your name. It is usually a requirement when you are borrowing over 80% of the property value. However, different lenders may have different lending criteria, so before applying for a home loan, make sure you check with your lender on what is required.
Some examples of genuine savings include:
• Funds that are regularly saved in a savings account
• Term Deposit
• Equity in an existing property
Although genuine savings are a requirement for lenders, it is also a great learning tool for you as it will help you learn how to budget for the mortgage repayments down the track.
What are non-genuine savings?
Non-genuine savings are contributions that were not saved by you. Some examples include:
• First Home Owners Grant
• Proceeds from a sale of an asset like a car or boat
• Borrowed funds (personal loan)
In order to be more competitive in the industry, many lenders are offering non genuine savings home loan products. These types of home loans are usually suitable for borrowers who are ready to purchase, have a non-genuine deposit saved (eg. gift from parents) and don’t want to wait the three months to accumulate their own savings.
Although these products can be beneficial for those who don’t have genuine savings, there are certain restrictions. Lenders may consider you a ‘higher risk’ borrower and may put provisions in place such as a risk fee or a higher interest rate, which could end up costing you more for the life of the loan.
A mortgage is a long term investment, so before opting for a non-genuine savings loan, make sure you consider if it is the right option for you long term. You may find it is worth waiting the extra three months if it saves you thousands over the next 30 years.