If you’re new to the home loan process or are a first home buyer, you may have heard the term “genuine saving” but aren’t quite sure what it means or why it’s important.
In this blog, we’ll explain what genuine savings are, why they are important in the context of your home loan and introduce you to some key ways in which you can build up your genuine savings and better your chances of securing a home loan.
What is Genuine Saving?
Genuine savings are funds that a potential borrower, such as yourself, accumulates over time through your own efforts and through disciplined saving habits.
When it comes to home loans, these funds can be looked at as an indication of your own financial responsibility and stability by lenders. The more genuine savings you have, the greater the indication that you can effectively save and manage your finances.
Genuine Savings vs Regular Savings vs Gifted Funds
Unlike genuine savings, regular savings refers specifically to money that is set aside periodically to accumulate. Genuine savings, on the other hand, goes a step further: It’s referring to savings that are self-generated by one’s own lifestyle practices.
On the other end of the spectrum, gifted funds refer to money received from an external source, such as a family member, and may not be looked at as an indication of one’s financial discipline or health.
For this reason, lenders may prioritise assessing one’s genuine savings over regular savings or gifted funds as a way of determining creditworthiness.
What isn’t considered Genuine Savings?
While the exact definitions can vary from lender to lender, typically the following funds are not considered to be genuine savings:
- Windfalls
- Bonuses
- Gifted money
- Prize money
Why are Genuine Savings for Home Loans Important?
Lenders use genuine savings to mitigate their own risk in lending money to potential borrowers. As part of the eligibility criteria of any given loan, such as a home loan, the lending institution will look at demonstrated history and records of responsible financial management so that they can rest assured there is minimal possibility of a default.
When you approach a financial institution for a home loan, they use a number of factors to assess overall worthiness. Stable employment for regular income is one, of course, but so is genuine savings. It gives the lender peace of mind that you are not relying solely on borrowed funds to finance your home purchase, nor are you dependent on an external source, such as inheriting an estate, to fund the purchase. Rather, it is your ability to save and accumulate savings that lowers your perceived risk to lending institutions.
The demonstration of genuine savings provides lenders with a safety net. In addition to having the capital required, there is an element of assurance that the potential borrower has the financial capacity to handle ongoing homeownership and financial responsibilities. The lower the risk, the more amenable a lender will be to lend funds.
How to Build Genuine Savings
How can you implement some responsible financial habits in your life to accumulate genuine savings for your home loan application? Here are just a few strategies:
1. Budget, budget, budget
Create a realistic budget for your household to track income and expenses so that you can identify opportunities for regular saving.
2. Automatic saving
Bank apps and websites allow you to set up automatic transfers to a separate savings account so that you can start saving slowly over time without having to consciously remember and take action.
3. Emergency funds
Set up and regularly contribute an emergency fund to cover unforeseen expenses without having to tap into your savings account.
4. Minimise expenses
There are numerous ways in which you can bring down the amount you spend and increase the amount you save. Here are just a few suggestions for cutting unnecessary household expenses:
- Save money by preparing meals at home rather than eating out.
- Cancel unused memberships and subscriptions.
- Sell unused clothing, furniture, and other items.
- Spend less time online on ecommerce stores so that you are less likely to impulse buy.
- Stick to a weekly budget for entertainment purposes.
- Pay down your credit card in full each month and refrain from spending more than you can pay off.
5. Actively save
In addition to automatically transferring money into a savings account, you can also explore more long-term savings strategies. This can include a term deposit which provides stable and secure option with a fixed interest rate over a set period of time. Or you can look into diversifying your investments through professional managed funds with potentially higher returns over time.
6. Take advantage of renting
Few aspiring homeowners actually realise that renting can sometimes be considered a form of genuine savings as it showcases financial responsibility and consistent ability to meet financial obligations. Using your renting history as a positive factor for the evaluation of your financial stability is considered another form of genuine savings for home loan purposes.
Looking for a home loan? Loan Monster is here to help
In many ways, it’s harder than ever for potential buyers and first homeowners to obtain the loan they need to purchase the home of their dreams. Genuine savings and a reliable financial history is just one of the many hoops applicants for a home loan need to jump through.
That’s why turning to the experts is a must. The team here at Loan Monster takes the scary out of home loans, so that you can understand realistically what you can afford and how you can go about getting approval.
