What are genuine savings, and how to use rent as genuine savings for a home loan?

Genuine savings refer to the money you have saved up gradually over time. What constitutes genuine savings may differ between lenders, but most will accept all or some of the following:

• Savings held or accumulated in your bank account for a minimum of three months
• Term deposits held for three months or more
• Gift money held in your account for more than three months
• Shares or managed funds you have held for more than three months
• Salary sacrificed funds under the First Home Super Saver Scheme

So, if you’ve been putting away $500 each month for the past year, you’ll have $6,000 (plus any interest earned on it) in genuine savings that can be used as part of your deposit for a home loan.

However, if you received a tax refund in your account the previous week, it won’t count towards your genuine savings. That’s because the money is usually required to be held in a bank account in your name for at least three months to qualify as genuine savings.

Consequently, gifts and windfall gains, like an annual bonus, don't generally constitute genuine savings unless the money has been held in your account for three months or more. After this period, some lenders may include such funds in your genuine savings while assessing your eligibility for a home loan.

Most lenders prefer that you save at least 20 per cent of the property's value as an upfront deposit. But having a low deposit doesn't necessarily mean you won’t qualify for a home loan. 

If you have up to 10 per cent of the property's value saved up as a deposit and meet the overall eligibility criteria, you can pay Lenders Mortgage Insurance to borrow the rest of the money for your home. However, many lenders will require that you hold at least five per cent of the deposit in genuine savings when you’re borrowing more than 80 per cent of a property’s price.

But why do lenders require genuine savings if you're paying the deposit amount anyway? It's a valid question, but lenders think differently about the situation. When lending you money, lenders want to make sure that you'll be able to meet your loan obligations in the long term. Having genuine savings demonstrates a regular saving habit and good financial management, which are indicative of your ability to service a mortgage with a lesser likelihood of defaulting on it.

It’s not uncommon to be unable to grow a sizable amount of genuine savings on top of your deposit - especially when renting. Rent money can take up a considerable portion of your income, making it difficult to build genuine savings for a new home. 

However, that doesn't mean you’ll be stuck in the rental race forever. If you’re serious about purchasing a house, and earn enough to repay a mortgage without reeling under financial stress, it might be possible to use your rental history as genuine savings to qualify for a home loan with some lenders. 

Why lenders ask for genuine savings is mostly to assess your income and expenses and how well you manage your money to create a surplus for other things. A strong rental history has the same effect. Paying your rent on time demonstrates financial discipline. It also indicates you manage your money well to meet your rental expenses promptly. You will still need to provide a deposit to qualify for a home loan, but lenders will factor in that your current rent payments will go towards your new mortgage payments. 

Banks and non-bank lenders that use genuine savings will probably require you to show a rental ledger from a licensed real estate agent. Depending on their eligibility criteria, some might want to see a history of timely rent payments for over a year, while others may be satisfied with just a three-month record. In case you're renting with friends or don't have a licensed real estate agent, some lenders may also accept a copy of your lease and bank statements to show the money transfer. 

If you're staying with your parents or don't have a rental history for some other reason, you may consider a guarantor home loan if you could get your parents to help you out. If you’re taking out a guarantor home loan, your parents or another family member will use the equity in their property to secure your loan. However, a guarantor needn’t provide security for the entire loan amount but only a portion, which could help reduce the guarantor’s risk while making it easier for you to get a home loan. It might be worth speaking with an expert mortgage broker to get more information regarding your options when borrowing with a low deposit.