What is genuine Savings?

Did you know that lenders have a mandatory savings policy when purchasing with a minimal deposit?

This is known as genuine savings. Genuine savings show the bank that you have a bit of skin in the game – some hurt money that you saved up yourself. Most lenders like to see at least 5% of the purchase price saved up in a bank account for 3 months or longer.

But there are a few exceptions to this rule. In this article, we will walk you through everything you need to know about genuine savings.

1. What is considered genuine savings?

Lenders consider the following as forms of genuine savings:

• Savings held or accumulated over 3 months.
• Shares or managed funds held for 3 months or greater.
• Equity in real estate or property.
• Bonus held for 3 months or longer in your bank account.
• Term deposits held for 3 months or greater.
• First Home Super Saver Scheme (FHSSS).
• Some lenders allow exceptions if rent has been paid for the last 3 months or more.

When are genuine savings required?

The majority of lenders agree on what makes up genuine savings, but where they differ is when genuine savings are required. Some lenders only need to see genuine savings if you have less than a 10% deposit (90% LVR), whereas others want to see it if you have less than a 15% deposit (over 85% LVR).

To play it safe, you can assume genuine savings are required when you are borrowing over 85-90% of the property value.

How much genuine savings should I have?

Most lenders generally want to see 5% of the purchase price as genuine savings. In some cases—like for investment properties— lenders require greater than 5% of the purchase price as genuine savings.

Keep in mind that the genuine savings requirement only applies to the purchase price. 

This means funds for stamp duty and other costs do not have to be held for 3 months or longer.

For example, if you’re purchasing a property for $500,000, you would need to hold at least $25,000 (5% of the purchase price) for 3 months or greater to meet the genuine savings policy. In addition to this, you would also need to hold enough funds to cover stamp duty/other costs applicable.

Also, be aware that Lenders Mortgage Insurance will be applicable if you have a deposit of less than 20%.

What is the 1% rule when it comes to genuine savings?

Most banks have something called the 1% rule. Essentially this rule is that any deposits of over 1% of the purchase price made within the last 3 months will be discounted from your genuine savings.

For example, Tim wants to buy a home for $500,000. He already has $1,000 in his bank account, and his savings pattern for the last 3 months looks like this:

According to the 1% rule, the $7,000 cannot be included in his genuine savings pattern because it is over $5,000, which is 1% of the purchase price. Now, if he had deposited this before the last 3 months, he would be able to include it in genuine savings. However, in this case, because it is within the 3 months, the 1% rule applies, so it will need to be removed.

2. What is not classified as genuine savings?

If you have a minimal deposit, just holding money in your savings account isn’t going to cut it as genuine savings.

The banks want to see that you have held those savings for at least a few months. So, the following items do not count as genuine savings if they haven’t been held in your bank account for at least 3 months:

• Gifts from Parents or relatives.
•  Inheritance from other family members.
• Refunds from tax returns.
• Bonus income from work.
• Sale of your assets like cars.
• First Home Owners Grant (FHOG) or Great Start Grant.
• Money held in a business banking account.
• Money from personal loans, credit cards or borrowed sources.
• Incentives paid from property developers or builders.

Here is a quick tip: If you’ve held any of the above funds in your bank account for 3 months or longer, this can be considered genuine savings. 

For example, if you sold your car 6 months ago and the money has been in your account for the last 6 months, this will be counted as genuine savings. But if you’ve sold it only in the last month, it won’t count until you’ve held the funds there for 3 months or longer.

3. Does rent count as genuine savings?

If you have a good rental history, some lenders will consider making an exception to the genuine savings policy. They will then consider deposits from other sources, like gifted funds from your parents that haven’t been held for over 3 months.

To use rent as genuine savings, you need to:

• Be currently renting and have at least 6 months of clean rental history. This means you should not have missed a single rental payment during those 6 months.
• Be currently renting via a licensed property manager, not a private rental. For example, renting from your parents will not be accepted.
• Ensure the names of the tenants on the lease are the same as the people who will be on the home loan application.

The good news is that if you can fit these criteria, the rent you have paid over the past 6 months will be considered genuine savings! Therefore you can use a deposit sourced from “non-genuine” savings like a gift from your parents.

You will need a copy of the rental ledger or reference letter from your property manager as evidence in order to use rent as genuine savings.

Something to remember here:  For the banks to consider that you’re paying your rent on time every time, you’ll need to pay before the period begins. For example, if your rental period is between the 1st and the 7th of each month, then making the payment before the 1st will be acceptable to the bank. So if you pay on the 28th of the previous month, this will be great. On the other hand, paying your rent on the 10th of the month (after the rental period) is considered a late payment and potentially means that your rental history isn’t sufficient to satisfy their genuine savings requirement. So be careful of that. Set up your payments a week before to ensure your rental history will come out clean.

Case study: Using rent as genuine savings.

Nicole lived in Perth and had been working with a local mortgage broker who was referred by family. She found the home of her dreams for $500,000 and entered into a contract with a finance clause because her mortgage broker had given her a thumbs up to make an offer subject to finance. 

Unfortunately, her finance application wasn’t all smooth sailing. The mortgage broker had not realised that she didn’t have genuine savings. Her deposit of $40,000 had come from the recent sale of her car. Needless to say, her local mortgage broker informed her they couldn’t assist because they could not demonstrate 5% of the purchase price held up in a bank account for 3 months or longer. 

But Nicole stubbornly refused to accept this fate and stumbled upon our Youtube channel. She wasn’t sure if we could help because she lived in Perth, and we’re based in Brisbane. But she was surprised to find out that we help home buyers right around Australia. 

When we spoke with Nicole, we found out that she’d been renting through a licensed real estate agent for the last 12 months, which was something that some lenders were able to include as genuine savings. This meant that instead of showing money held in her bank account for 3 months or longer, we could use her rental history to show the banks that genuine savings were demonstrated. Using this strategy, we managed to successfully secure finance for Nicole’s dream home.

Bonus: Using Your Super as genuine savings

The First Home Super Saver Scheme is a scheme designed for first home buyers which allows you to put extra money from your pay into your super and then use that money as a deposit. The good news is if you’ve been putting money away into the First Home Super Saver Scheme, all that money can be considered genuine savings! 

There are limitations on the amount you can save using the First Home Buyer Super Saver Scheme. At the moment, the maximum you can put in any one financial year is $15,000 and, in total, $30,000 across all years. However, it’s a really great scheme if you’re a first-home buyer and want a quick and easy way to prove genuine savings.Remember: These are contributions on top of your minimum, and this only works if you were making payments over and above the regular contributions. Your minimum super contributions will not count as genuine savings because these contributions are normally taken from part of your salary anyway and therefore do not prove that you have genuinely saved.