Some lenders may want to see proof of “genuine savings” before giving you a home loan, especially if you have a low deposit. But what exactly does this mean? How does it work? And can paying rent really count as genuine savings?
“Genuine savings” is simply money you’ve personally put aside over a period of time – usually a minimum of three months. Often when you apply for a mortgage with a loan-to-value ratio (LVR) of more than 85% or 90%, lenders will want to see that at least five per cent of the money you’re using towards your property consists of genuine savings.
They do this because they want to know you’re likely to have the financial discipline to keep meeting your loan repayments once you have a mortgage.
How does genuine savings work?
Genuine savings doesn’t necessarily mean paying some of your salary each month into a separate bank account (although this will be genuine savings). Instead, it can take many different forms.
What matters is that you’re doing it regularly and that it’s not a one-off payment to you, such as a bonus or gift or the proceeds from the sale of an asset.
In fact, some lenders will accept rent payments as evidence of genuine savings, as paying rent shows an ongoing commitment to regularly putting money aside.
Rent and genuine savings – how to qualify
To have rental payments qualify as genuine savings, you’ll usually need to be currently renting and be able to show a solid history of meeting your payments on time. To satisfy this, some lenders will insist on seeing proof you’ve paid a whole year’s rent but others may be happy with as little as three months.
If you’ve been renting with others, you may still qualify so long as you can show that your name is on the rental agreement and rent money has been regularly leaving your bank account. You may also have to provide a declaration from a licensed real estate agent, stating the length of your tenancy, the current rent and your history of meeting repayments.
What else might qualify as genuine savings?
Rent is not the only thing that a lender is likely to accept as evidence of genuine savings. They may also accept other instances of you regularly putting money aside such as:
- Savings paid into a term deposit or high-interest savings account
- Shares and managed funds you’ve held for more than three months
- Any payments you’ve made to the First Home Super Saver Scheme
- Any deposit you’ve already paid to a real estate agent or developer, so long as the money wasn’t borrowed.
Say you’re looking to buy your first home worth $550,000. In this instance, a lender may expect you to have genuine savings of five per cent – or at least $27,500 – even if you had a total deposit of 10% of $55,000 to put towards the property.
That means, for instance, if you had saved $20,000 and your parents had given you the extra $35,000 you may have your loan declined.
Options if you don’t have genuine savings
Some lenders will still provide home loans of up to 95% of a property’s value even without evidence of genuine savings. Speak to a mortgage broker, who may be able to help you work out which lenders fall into this category so that your loan application has a better chance of success.
Alternatively, you may be able to avoid the genuine savings requirement if you use a guarantor on your loan.