Does it matter where my deposit comes from?
In short, when you are applying for a home loan, it does matter where your deposit comes from.
In recent years, many Australian lenders have implemented a policy whereby a borrower is required to have at least 5% of genuine savings before they can be granted a loan. This policy was adopted in response to growing numbers of first home buying hopefuls applying for loans with little to no deposit.
So, what does this mean?
Essentially, you will have to prove to the lender that you have saved a large portion of your deposit yourself, using a steady savings plan. This amount will vary from lender to lender, but generally speaking, if your LVR is less than 80% you shouldn’t require genuine savings. If it is more than 80 but less than 85%, most lenders won’t require genuine savings (though some may). If you’re LVR is above 85%, there is a very strong chance that you will have to prove your genuine savings.
There are a couple of lenders who don’t have this savings clause at all, but they may present other pitfalls, such as inflated interest rates or heavy exit fees.
What is not considered genuine savings?
Upon application, lenders usually request three months’ worth of bank statements. This is so they can assess your ability to service a loan, and so that they can have a look at where your savings has come from. If they see a large, unexplained sum deposited a month ago – they are going to ask some follow up questions. Here is a list of things that may throw a spanner in the works:
- Inheritance
- Tax refund
- Gifts
- Funds from the sale of your car, or other items
- Builder’s incentives
- Personal Loan
- Monetary wins at casino or races etc.
- First Home Owners Grant (FHOG)
Yes, that’s right - even if you have been left an inheritance, you cannot immediately use this as a deposit to apply for a home loan. Of course, there are many exceptions to the above, and many ways in which you can make your application be viewed more favorably.
How can I get around this?
If you have held or accumulated an amount for over three months in a bank account in your own name, then you should satisfy the ‘genuine savings’ criteria. As you usually only require 3 months’ worth of statements, it is unlikely that the lender will delve further back to see where this money originated from. This is the case for inheritance, tax refunds and sale profits.
Some lenders still do not look kindly on gifts of any type, as they may think you have to repay your friend or family member over time, which would reduce your ability to comfortably manage your future loan repayments. The same can be said for personal loans, and these can also negatively impact your credit score.
If you are renting, and have made your repayments on time for at least 12 months, then you can use this to fulfil the genuine savings requirement. While you may not have saved that money to put towards your deposit, it is still evidence that you are able to stick to repayments and will most likely be a good borrower. Of course, you will still need to have deposit funds from elsewhere (inheritance etc.) but at least this way, you won’t have to prove that these funds are a result of genuine saving.
So, if you have been gifted a nice handy sum as a birthday present, or you are planning on trading in your car for a $10k profit, be warned: just because you have enough money for the deposit, does not guarantee the bank will grant you a loan. If this article has made question your loan eligibility, this is a genuine scenario in which a mortgage broker can assist you. Mortgage brokers know all the tools of the trade; they know how to present your case in a way that will satisfy the lender’s requirements, and they can come up with different methods to help you toward approval – and get you into that beautiful home.
Disclaimer: The information provided in this article is not legal or financial advice. It has been prepared without taking into account your objectives, financial situation, or needs. Before acting on this information, you should consider the appropriateness of the recommendations, having regard to your own objectives, financial situation, and needs. We encourage you to consult a finance professional before acting on any suggestions provided in this article or on this website.
