When you apply for a home loan, your potential lender will consider a range of factors to determine your ability to repay the loan. One of them is your real savings.
Genuine savings give the lender an idea of how well you are managing your money, demonstrating how much of a liability a loan can be for you.
A lender may ask you to show proof of actual savings during the home loan application process.
But what really counts for real savings?
True savings are defined by a clear pattern of consistent savings over time.
For example, if you save $1,000 per month for 12 months, your true savings would be $12,000.
Lenders want to see that you’ve consistently saved for at least three months (bonus for anything longer) because that’s not just a measure of your enthusiasm for home ownership, but a demonstration of your commitment to financial stability. And lenders like stability.
Genuine savings can form part of your home loan deposit and serve as a demonstration that you will be able to repay your mortgage.
Here are some examples of what lenders may call real savings:
- Savings accumulated or held for more than three months
- Term deposits that you have held for more than three months
- The contributions you have made under the First Home Super Saver program.
Inauthentic savings are usually funds that have been gifted to you, or at least money that you haven’t saved yourself over time.
The reason inauthentic savings aren’t treated with the same smiles as genuine savings is that they don’t demonstrate your ability to budget or save.
Of course, you can use your non-genuine savings to increase your deposit, but that won’t have as much convincing power as your real savings.
Here are some examples of what lenders may consider inauthentic savings:
- Cash gifts
- Legacy
- Tax refund
- Bonuses
- Equity in an existing property
- Amount received from the sale of a property
- Money received from the sale of shares
- Grant to first home owners
- Borrowed money
- Short-term savings
Generally speaking, the larger your deposit, the less real savings the lender will be looking for.
For example, if your loan to value ratio (LVR) is 80% or less – which is a 20% deposit – you may not actually need to show real savings.
However, for those with an LVR of 85-95% or higher, the likelihood of a lender asking for proof of actual savings increases.
The more your regular savings amount looks like the type of number you’ll find on a home loan repayment bill, the better. So what can you do to make your real savings history look solid?
If your savings seem a bit thin, you may need to create a new budget. Here are 25 weird and easy money-saving tricks, tested by Mozo’s editorial team, that can give you an idea of the ways you can cut the grease on your budget.
Or, check out some high-interest savings accounts, so you can watch your future home loan deposit grow.
In the meantime, those considering buying should do their research before jumping into an app. Check out Mozo’s home loan guides and lay the groundwork for your home buying journey, or take a look at some of the current home loan rates on the market.