Home Loan Rate – Australia

What are genuine savings?

The majority of Australian lenders have a policy requiring you to have “genuine savings” before they will approve your mortgage. In effect, it is proof of your ability to manage your money effectively and live within your means.

Genuine savings is not necessarily money saved in a savings account, it can come in many forms and each lender has their own policies regarding what is and what is not genuine savings. As a general rule if you are borrowing over 80% LVR then you need to prove 5% of the purchase price as genuine savings.

Common genuine savings types

These types of genuine savings are regularly accepted by most major lenders:

• Savings that have been made or held in an account for three months or more (including First Home Saver Accounts).
• Shares or managed funds that have been held for three months or more.
• Term deposits that have been held for three months or more.

Ideally your savings should be held in a separate account to your day to day spending and the balance of your account should be increasing over the three month period. Any large lump sum deposits during the three month period will not be considered as genuine savings.

What is not genuine savings?

The deposit for your new home can come from many different sources. The vast majority of sources that do not involve you saving the money yourself will not be considered as genuine savings. Some examples of deposit types that are not accepted as genuine savings are:

• Financial contributions from your family or parents (e.g. gifts / loans).
• Loan from a friend.
• Personal loans / cash out from credit cards.
• Vendor / builder rebates, cashbacks or discounts.
• Pay in advance from your work.
• Money saved in cash (i.e. not in a bank account).

As a general rule if it doesn’t meet the genuine savings criteria listed above then it will not be considered as genuine savings.

Don’t worry too much! You may qualify for a no genuine savings mortgage, if you apply with the right lender this requirement may be waived. In most cases the cost of a no genuine savings home loan is very similar to a loan with a requirement for genuine savings.

Grey areas…

The policy used by lenders to assess genuine savings is very complex, and in addition to this there are some types of savings that can be accepted on an exception basis. The secret to getting approved is to apply with a lender that accepts the type of genuine savings that you can provide.

Some examples of genuine savings that may or may not be accepted by the lender are:

• Equity in existing real estate (i.e. you own a property already).
• Extra repayments on your debts made over the past three to six months.
• Rent payments (must be through a property manager and have been 12 months in your current residence).
• Tax refund (must be currently renting to be accepted).
• Inheritance (must be currently renting to be accepted).
• Sale of a non-real estate asset (must be currently renting to be accepted).
• Commission or bonuses from your job (must be currently renting to be accepted).
• Money that comes from a non-genuine source (e.g. a gift) that have been held in a savings account for three months or more.

Please refer to the specialist mortgage brokers at the Home Loan Experts if you would like to know more about using one of these methods to prove genuine savings. You can view their page on genuine savings for more information.

Do the major banks require genuine savings?

Yes, at present all of the major banks have a requirement for genuine savings. ANZ & CBA tend to be quite strict with this requirement while Westpac (WBC), NAB & St George (SGB) have slightly more flexible policies. Please note that all of them are relatively strict when compared to lenders that do not require genuine savings at all and have similarly priced mortgages!

In addition to this the two major LMI providers Genworth and QBE LMI both have requirements for genuine savings under their standard products. Both will accept no genuine savings loans under their non-standard LMI products however the LMI premium may be higher and credit assessment will be significantly stricter.

What is Sepp 5 zoning?

A Sepp 5 development is a specialized block of units, townhouse estate or village where the occupants are restricted to be either over the ages of 55, pensioners, disabled or elderly couples. These developments have approval from the local council to build more units on a block of land then what is usually allowed, this means the cost of each unit to build and sell is cheaper than the same type of units in the same area. This way it can be marketed better to the baby boomer generation.

These developments have been specifically designed to assist the day to day living for elderly people who require certain features for example:

• Access ramps in ever building
• In area medical centre
• Specialized bathrooms
• Larger doorways
• Public transport which comes straight to the development
• Meal deliveries
• Community activities
• Community with people of similar ages
• Low maintenance security upkeep

A Sepp 5 development is different to a retirement home, it is an independent living accommodation where the occupants has ownership of each separate title and there is no in-house nurse, there is no set time for dinner and activities. It is an over 55s friendly environment where the occupant is free to do what they please and is self reliant.

Why Invest in a Sepp 5 Security?

The reasons for purchasing a Sepp 5 accommodation to live in have been outlined above; the reasons for investing in one are below:

• Excellent rental yield
• Good price – for the price of the same unit dimensions unit in the same area Sepp 5 is generally cheaper
• Usually located in growing areas within 10 mins from major cities
• Usually cash flow neutral or positive

How can I apply for a Sepp 5 home loan?

Sepp 5 or over 55 securities are only taken on as standard securities by less than a hand full of financial institutions, depending the where the security is and the loan amount. Most banks are uncomfortable in lending against these securities as they believe that is harder to resell as it is a restricted market.

It is best to contact a specialist Mortgage Broker who deals in these kind of scenarios on a daily basis. You will have to show that you can afford to make repayments and have ongoing cash flow. Unfortunately if you are retired and on the pension then this will restrict the size of the loan that can be approved. However investors buying these properties to rent out can get approval for a mortgage.

When applying for a mortgage, no doubt you have shopped around for the best interest rate and lowest fees. However almost nobody checks to see if their application meets the lenders guidelines & credit policy!

You see, the problem is that lenders don’t publish their rules to the public. That would make it too easy for people to find loopholes and “game” the system. Every financial institution in the USA, UK & Australia has its own set of rules they must abide by before approving a mortgage.

The credit assessor in the bank who signs off on the approval must follow the guidelines which has been created by the bank, otherwise they risk losing their job. For this reason credit policy is often treated like gospel, and it is rare for policy exceptions to be made.

Each financial institution lending money has different guidelines with specific differences and certain things they cannot approve. This is where the assistance of a mortgage broker is essential as they have knowledge and access to all the lenders guidelines to make sure that your application is perfect for the bank that it will be placed with.

For a standard application with a large deposit, long term employment and no credit history issues this is considered as the perfect application for a bank & will be accepted by everyone. But let’s be serious, not many applicants are like this. Many people have credit impairments, short term employment, unsecured debt, a small deposit or a combination of all of these.

What is in the Lenders Guidelines?

The Lenders Guideline is the rule book of what the Bank looks at and what they can accept when approving your loan:

• Employment – Banks generally require a minimum of 6 months in current job, most do not accept probation and usage of casual or 2nd Job Income must be evident over 12 months.
• Credit Report – Mainly for credit impairment the lenders guideline will advise how many defaults, amounts or timing of defaults which are acceptable to them.
• Savings – Generally all lenders are now requesting that evidence of the deposit be saved over a 3 month period this being called “Genuine Savings”.
• Age – Although lenders are not allowed to discriminate against age, but they may show a stricter view to people who are close to retirement.
• Security – All Lenders will have a list of what type of securities they can take on, this will also provide of list of types they cannot accept and certain areas that they will not do either. Vacant land is a prime example this will advise the maximize size of land they can accept.
• Types of loans – The Lender Guideline will outline what type of loan the bank can accept from purchase, refinances, low doc, guarantor loans, trusts or company purchases.
• Documents – from payslips to tax returns this will outline what is required for each client.

As you can see the guidelines are complex. However the key is that they vary between lenders! Apply with the right lender and your problem is solved! The best way to find the right lender is to use a mortgage broker who specialises in the credit policy of each bank.