How to remove genuine savings hurdle for first home buyers
What is Genuine Savings?
Funds held in an account ( at least 5% of purchase price) in the name of the borrower for 90 days or more or saved over that time is best. Once 5% is saved evidence that you have continued to save is even better. This evidence makes it easier for the bank to fulfill their internal requirements. Banks want to lend money to customers but can only do so when an application meets their criteria.
If the full amount is not in your account 90 days prior to the application then the lender policy requires the lender to show the money has been accumulated through income. For example, if a friend or relative owed you a large sum of money and repaid that debt at day 45 then this would not be considered genuine savings. ( In a rare cases this could be acceptable if it was a formal loan and we could show evidence and documents.
When borrowing more than 80% of a homes value LMI or lenders mortgage insurance is required in most cases. Some lenders may lend up to 85% of a homes value without mortgage insurance.
Once LMI is required the lenders internal lending policy becomes dictated by the policy of the mortgage insurance provider.
Why do they do this?
The banks and mortgage insurance companies believe, “borrowers who have saved a deposit are generally more likely to be prepared for difficult circumstances.” It would be difficult to argue against this. A good pattern of saving over a period of time prepares home buyers for the discipline of repaying a mortgage.
How is it defined?
To be considered genuine 5% of the purchase price must be held in the borrowers name include:
- Funds held or accumulated in savings accounts for 3 months or more
- Equity in residential property
- Term deposits held for 3 months or more
- Shares held for no less than the last 3 months
- The mortgage insurer may allow a gift / inheritance to be used where savings have been sacrificed by making accelerated loan repayments over the last 3 months. In these circumstances, the existing savings plus the value of excess repayments must be equal to or greater than the minimum savings required.
What is considered non genuine savings?
The following are considered non genuine savings and do not contribute towards the 5% genuine savings requirement and include:
- Gifts or inheritance (see Genuine Savings above)
- Proposed savings plans or Rental Purchase Plans of any kind
- Sale of assets (other than real estate) for example, motor vehicles
- Funds held in company/business accounts
- The proceeds of a personal loan
- Builder’s or vendor’s rebate/incentive
Can you still get a loan without genuine savings?
Yes. There are options.
- Rent. If you have 5% deposit and can show 12 month clear rental history in the name of the borrower then this conduct may be considered evidence of genuine savings.
- Borrowed funds. Funds that you have borrowed may be considered with some lenders. In this instance your credit history would need to be very good and the repayment of the loan used as deposit and the mortgage itself would need to fit comfortably into the lenders serviceability calculations. This option is usually for people with higher incomes or upper to middle incomes that have a low reliance of consumer credit such as credit cards or store cards.
- Gifts. You can used gifted funds. However, every lender will still prefer to see savings history.
- Guarantor Home Loans: If you do not have genuine savings the getting help from a family member may be a solutions. In this case the family member needs to own a property with equity ( Value of the property minus any existing debt or loans) that they will offer the bank as security in place of you saved deposit.
When it comes to guarantor home loans their are many different criteria. Each lender has specific and strict rules about who can be a guarantor. Some lenders even specify which category of family members can help. Others will even accept a non related guarantor. If the guarantor is unrelated we will need to give the lender some background. For example, a applicant who’s parents live in another country with no local assets could use a close family “uncle” (not really related) if the bank was happy that all their criteria have been met.
Does the guarantor need to be able to service the loan?
This is a significant question. Given that first home buyers are waiting longer (in general)to enter into committed relationship and seek their first home the age of the guarantor can be a factor.
First and foremost the guarantor must have capacity to enter into the transaction. This is common sense and is a must. Secondly, we need to establish that the guarantor is aware what is involved in being a guarantor and what the consequences are should the main applicant default on the loan.
Some lenders cover off all these issues by requiring that the guarantor obtain separate financial or legal advice and supply written evidence of receiving this advice to the bank. Some banks are happy that the guarantor self certify that they understand the transaction.
When it comes to the issue of serviceability we find that this can often be the sticking point. A guarantor may own their property free and clear but have no income other than retirement income such as fixed income streams of the pension.
When this happens as mortgage brokers we have to rule some lenders out. They will require that the guarantor be able to pay the guarantee part of the loan off. This is usually 20% of the total loan amount.