Are my savings Genuine? What exactly constitutes ‘Genuine Savings’ and do I need them?
September 12, 2016
We all understand the concept of ‘savings’...even as kids we were introduced to the idea of saving with our pocket money, and we all probably had a little piggy bank or something similar we’d top up now and then in an effort to purchase that something special. If you’re new to the process of purchasing a new home however, you may have only recently come across the term ‘genuine savings’, and if you haven’t yet, you no doubt will soon…
So what exactly are ‘Genuine Savings’ and what makes savings as we know it, ‘Genuine’?
Basically, Genuine Savings is a lending industry term that refers to deposit funds for a property purchase that have been genuinely saved over a defined period of at least 3 months. Some examples of what can be considered Genuine Savings include:
A consistent savings pattern that’s been established over a period of at least 3 months; so all savings held and accumulated over that period.
Term deposits held for at least 3 months
Shares (or a managed fund) held for at least 3 months
Equity in an existing property/land
Inheritance or a Gift (but only if held in an account for at least 3 months)
You can see a pattern emerging...with 3 months being the consistent minimum amount of time considered for the above to be genuine forms of saving, which is the case for most lenders. Genuine Savings must also be held in the name of at least one of the borrowers, and generally speaking they need to be liquid in nature i.e. they need to be held in a bank savings account or otherwise be investments that can easily be sold and quickly converted to cash.
With that in mind, the following are typically NOT considered forms of Genuine Savings for the purpose of a home deposit
First Home Owners Grants
Borrowed funds (such as Personal Loans)
The sale of personal assets other than property (such as the sale of a motor vehicle)
Tax Refunds (though put your tax refund into a savings account and 3 months later it’s a different story!)
Lump Sum Deposits
Funds held in a business account
Developer/Builder rebates or incentives
So now we know what is and isn’t considered Genuine Savings for the purpose of a deposit...but are Genuine Savings always needed as part of the home purchase process? The short answer is No.
For most lenders, Genuine Savings are required if their the Loan to Value Ratio is higher than 85%. So if the value of your loan is more than 85% of the value of the property you’re seeking to purchase, then Genuine Savings are likely required.
But how much in Genuine Savings are needed? Well, it depends…
If you’re planning on building or purchasing an owner occupied property (so you plan on living in the house you’re purchasing) you’ll need to contribute 5% of the security value as Genuine Savings, yet if you’re building or purchasing a property as an investment (but will not be living there yourself) you’ll need 10% of the security value in Genuine Savings.
Let’s look at an example scenario:
Brett and Emily are a young couple with a baby daughter seeking to purchase their first home. They have been considering house and land packages where the title is not until June 2017, so they have a bit of time up their sleeve…
They have funds in a trust account to the amount of 22K, but were advised that these wouldn’t be considered Genuine Savings because they had only been placed into the trust 1 month prior.
However, in an effort to help them secure their dream of purchasing a new home for their growing family, we came up with a solution...An arrangement was made whereby they can pay a deposit on the land using funds from their trust, and after 3 months (sound familiar?) this land will become Genuine Savings that can be used to apply for the full loan.
At this stage a deposit has been paid on both the house and the land to lock in the price on the house itself, while Brett and Emily wait for the land to be considered Genuine Savings/Equity for the purpose of their full loan.
So if you think you may struggle to demonstrate Genuine Savings, don’t despair! Call one of our New Home Advocates today for a chat about how we can help you make your new home dream a reality...we made it work for Brett and Emily and we’ll do our best to make it work for you too.