When applying for your home loan, you will need to prove genuine savings. Here is how to do it.
In order to obtain a home loan, most lenders will request proof of ‘genuine savings’. The reason they would like to see your savings is two fold; firstly for the deposit, secondly for proof of your ability to save with discipline.
We will get to the true definition of genuine savings in a moment, however before we do it is important to discuss why the proof of savings isn’t simply a lending requirement, but instead a good test to see if you can indeed service a loan yourself.
People often see genuine savings as nothing more than a bureaucratic hurdle to jump through, though in my eyes, it is far more important than this. Genuine savings is a way for you to stand back and look at your spending, your saving habits and ask yourself ‘Can I actually afford this loan and the repayments it requires?’.
In the heat of the moment, not many people will actually say ‘no I can’t afford this loan’ as they truly want the home. However how do you know that you can indeed afford the house? Interest rates might go up, you may have a child, your income may diminish or most likely – you have no exercised discipline in saving money your entire life (like most people).
To this point, I ask you to really think long and hard about your home loan. Ensure you can indeed afford it, regardless of interest rate rises and that you are not overstretched to afford the loan. Remember, you still need to eat, drink, sleep and work with the money you have left over.
Now onto genuine savings. What are they, how do you boost your savings and a few other tips and tricks you need to know to really grow that proof of savings. Here is how to boost your genuine savings.
What are genuine savings?
Genuine savings are 2-4 months worth of savings, proving that you have the ability to save money and not spend. This is the bank, or lenders way of checking you are going to be able to service the loan (make repayments).
The savings should be made regularly and in incremental fashion. You cannot simply dump cash into an account and say ‘here you go’. You must show that weekly, fortnightly or monthly you have contributed to your savings and grown the overall savings account considerably.
Genuine savings are increasingly becoming required, however often it is mandated heavily when a customer is borrowing over 85% of the home value.
What are some examples of genuine savings?
- Regular deposits to a high interest account over a 3-4 months period.
- Built up equity in an existing property.
- Term deposits or notice savers that have been active for 3-4 months.
- Share purchases that are over 3-4 months.
- Gifts, cash and inheritance money that has been held in the savings account for 3-4 months.
- Deposits into a first home saver account.
Ways to make it easier to prove you are indeed responsible for the savings
Your lender will want to see that you are indeed responsible for contributing to and growing your genuine savings account. This means you need to provide transaction proof that you were the one who indeed deposited the money regularly.
It is suggested that you have a high interest savings account or some other separate bank account that can be connected to your everyday banking. From there, you can transfer money to the account as and when you can afford.
It makes it much easier if all of your deposits are never withdrawn and each transaction comes directly from your primary account, to a savings account that is also in your name.
The same goes for shares and term deposits; ensure they are all under your name.
Strategies to boost your genuine savings history
Some basic ways to boost your savings and over 3-4 months, your genuine savings history.
- Get part of your salary directly credited to your savings account.
- Create automatic debits to pay your savings account like a monthly bill.
- Round down your everyday account and transfer small amounts to your saver.
- Ask for cash when it comes to present giving time, deposit it yourself.
- Reduce your spending for 4 months and boost your savings.
- Cancel as many direct debits and expenses as possible – save the money instead.
- Take up a second or part-time job to drive genuine savings growth
Rental payments as proof of genuine savings
People about to buy a house often ask whether or not rental payments can be utilised as proof of genuine savings.
Sadly this cannot be answered as every lender is different. What I can say however is that some lenders do indeed allow rental payments as proof of genuine savings. They will still want to see a 5-10% deposit though the formality of proving you can save may be overlooked if your rental payments were frequent, in good standing and work in tandem with your existing savings account.
It is suggested that you still open a high interest savings account and contribute money into it, as this will further prove your ability to make repayments on your future home loan, however rental payment may be the backup you need should a lender feel unsatisfied with your genuine savings to date.
Selling assets to contribute to genuine savings
It is wise to note that most lenders will not count the sale of an asset as proof of genuine savings. For instance, you can’t just sell a car, pocket $10,000 in cash and say ‘here you go’ as proof of your ability to save.
What you can do however is sell the asset, deposit the cash into your genuine savings account and hold it for 3-4 months. After this time, the cash in the account will be considered part of your genuine savings and on the flip side; drive your saving efforts towards the 5-10% deposit.
Some assets you may consider selling include:
- The second car
- Unused household items
- Big ticket items like holiday homes
What cannot be accepted as genuine savings when applying for a loan?
- Money you borrow from elsewhere (e.g. a loan you take out to deposit into your genuine savings account)
- An asset that was immediately sold (see above to know what to do)
- Any Government grants for home ownership
- Money that someone else has paid into your genuine savings account
- Gifts, cash or inheritance money that hasn’t been held for 3-4 months in your account
The final word
Before getting your home loan, factor in the concept of genuine savings. Sell off money consuming assets (cars, bikes and boats) and use the money saved on repayments (or the equity in the asset itself) to grow your savings account.
It would also be wise to consider closing down any available sources of credit, like credit cards and personal loans prior to applying for your home loan. Why? Even if you don’t owe anything, lenders will see these lines of credit as a liability and will change the amount they are willing to lend to you based on the ‘possible’ scenario you max out those credit lines.
Open your high interest savings account and get saving. Every dollar you put on the mortgage today will save you a few in the future. Now get on with it!