One of the biggest barriers to buying a home is saving the deposit but recent changes to lending policies means it’s now easier to get a home loan if you don’t have genuine savings.
That’s because Genworth, Australia’s largest Lenders Mortgage Insurance (LM) provider, no longer requires 5% genuine savings if you have more than a 10% deposit.
In addition to this, more lenders now accept rent as genuine savingswhich is a huge win for first home buyers who are struggling to save a deposit to get out of the rental trap.
Genuine savings not required when borrowing less than 90%
Previously, you needed genuine savings if you were borrowing more than 85% of the property value (85% LVR).
This is now only required when borrowing more than 90% LVR, although there a no genuine savings home loans when borrowing between 90-95%.
In this way, borrowers with larger deposits (more than 10%) can use funds outside of their own savings to put towards the purchase.
This can include:
A gift from your parents.
Advances in wages/commission from an employer.
Sale of a non-real estate asset.
First Home Owners Grant (FHOG).
Proceeds from the sale of a property or a motor vehicle.
Windfall gains from shares or other investments.
Many lenders have Genworth as their mortgage insurance providerso it’s a good sign that the home loan industry is recognising the challenges that first home buyers (FHBs).
Home Loan Experts senior mortgage broker Raul Malate said this savings loophole will help good borrowers to get their foot in the door.
The policy changes comes as a record numbers of FHBs re-enter the real estate market after so long out of the loop – great timing!
What about using a personal loan?
Using a personal loan as a deposit is only suitable if you’re in a strong financial position and have a good history of making your repayments on time.
Raul adds another word of warning.
“If you borrow 10% deposit as a personal loan, the lender will most likely check that the personal loan you borrowed matches your deposit and could decline the application as they do not accept borrowed funds,” he said.
What’s changed with rental history as genuine savings?
The policy is still the same but the good news is that rent as genuine savings is now accepted by more lenders!
This purely because Genworth have changed their tune (they’re kind of a big deal in the mortgage space).
To better your chances at approval, you need to ensure that your rental history is coming through a licensed real estate agent.
Rental history can’t be accepted if it is a private agreement or lacks a formal lease agreement.
If you’re paying a landlord cash in hand, this will fall under non-genuine savings and you’ll likely be declined.
There are some lenders and LMI providers that won’t accept rent as genuine savings at all but they will now give you a reduced LMI premium for a non-genuine savings home loan.
Tougher no genuine savings rules
To now qualify for a no genuine savings home loan when borrowing over 90% of the property value, your serviceability must be strong (1.1x as opposed to 1.0x).
In other words, you must be able to afford all of your debts at a loaded interest rate and living expenses and have a 10% buffer left over.
In addition to this, you cannot:
Purchase or construct an investment property.
Purchase vacant residential land.
Purchase a property exceeding 2.2 hectares in size.
Use the funds from the loan to undertake home improvements
Refinance an existing mortgage
Release equity (cash out)
Bear in mind that you will pay a higher interest rate and a higher LMI premium by going with a non-genuine savings lender, Raul warned.
Golden tips on genuine savings
Although no genuine savings loans opens doors for low deposit customers, having genuine savings is always more favourable to lenders.
It also means you can qualify for much sharper interest rates with more lenders.
However, saving a deposit is easier said than done, especially in a market where living expenses are high and income is not growing at the same pace.
Here are some tips for all home buyers:
Create a savings plan and seek financial advice if necessary.
Understand your financial situation and what you can realistically afford to pay each month
Don’t apply for credit like a personal loan or a credit card if you don’t need it.
If you have existing debt, pay it down as much as you can before applying for a home loan including reducing the limit on a credit card or cancelling it altogether if you barely use it.
Don’t change jobs before applying for a home loan.