When applying for a home loan, simply having a wad of cash isn't enough. Often, you'll need 'genuine savings' to show a lender.
Lenders will want to see that you have saved up a certain amount of money over a period of time to put towards your house deposit. A house deposit usually needs to be between 10% and 20% of the value of the property. The other thing to ensure about your savings is that they are considered 'genuine'.
What are genuine savings?
'Genuine savings' is a phrase used by lenders to describe savings that you have accumulated over a period of time. Genuine savings are different from regular savings sitting in your bank account that you may have received through a tax return or been given as an inheritance.
Genuine savings show a lender your ability to save money over a period of time. Genuine savings must be held in the borrower's name.
The following things are often classed as genuine savings:
- Savings held for at least three months
- Term deposits with terms lasting more than three months
- Funds that have been salary sacrificed under the First Home Super Saver Scheme
- Shares or managed funds that you have held for a minimum of three months
- Equity in your current property
What isn't genuine savings?
Simply having money in your bank account isn't always enough. The following things generally don't count as genuine savings because they don't demonstrate good saving habits. Instead, they only show you have been fortunate enough to come into some money.
- Gifts or inheritances
- Tax refunds
- Work bonuses
- The First Home Owners Grant
- Asset sales (such as a car)
- Money you have borrowed from someone else
- Rent payments (though this can vary depending on the lender's policy)
- Grants or bursaries received
Why do lenders look for genuine savings?
Genuine savings are important to a lender because it shows them you are able to save money consistently over a period of time. Serviceability is an important part of the lending process because lenders need to make sure they're giving a loan to someone who has the ability to repay it.
Lenders have genuine savings policies to make sure you won't default on the loan. People who are borrowing more of the property's value are generally considered to be a risky borrower, while someone who has saved up for a bigger deposit has already proved they are more trustworthy and will have the ability to make the loan repayments.
When applying for a home loan, lenders will look at your bank accounts and scrutinise your spending by looking into:
- How much money you spend in any given week or month
- How much you spend compared to your income
- How much debt (if any) you have
- What you spend your money on
How to build genuine savings for your house deposit
To save genuine savings for a house deposit, you will need to develop good savings habits. Here are some basic savings tips to help build genuine savings for a deposit.
Automatically transfer a lump sum into your savings
Decide how often you want to deposit the money and the amount, and make it automatic. That way, you don't need to remember to do it manually every week. By automating your savings, you don't see the money, so you won't be as tempted to spend it on things you don't need. You also won't sabotage your own efforts to save by 'forgetting' to transfer the money.
Create a budget and track your spending
If you've got a specific savings goal, like a house deposit, it's important to have a good understanding of what money you have coming in and what expenses are going out. Some will be easy to monitor (rent, bills) and others will be harder (entertainment, eating out). This is where apps that automatically track your spending can be extremely helpful.
Eliminate unnecessary spending
It's definitely easier said than done, but you have to cut back on unnecessary impulse buys when you're trying to save up for something. If the thought of withdrawing money from your savings account to pay for things is too tempting, lock your money away into a term deposit or a savings account that penalises you for making withdrawals.
Invest spare money and bonuses
Received a big tax return or a pay rise at work? Before you go and spend it all, put the money straight towards your savings goal for an instant cash injection.
Look for areas you can cut back
'Spending leaks' are those small regular purchases (like your morning latte) that add up over a period of time. If you're trying to save money, cut back on these areas as much as you can. A $3.50 coffee every morning may not seem like much, but it will cost you $840 over a year.