Savings History

First home buyers may find themselves behind the eight ball when it comes to applying for a home loan for the first time. Banks are always more careful when it comes to approving these loans because of the higher risk involved.

When you look at it from the bank's point of view, you are asking them to give you a loan of several hundred thousand dollars with little to offer by way of proof that you can repay the loan. So, in essence, the bank has to be very careful and so they use a number of criteria to determine whether a home loan should be approved.

Every time a bank assesses an application for a home loan they look at the following things:

In the main, banks are careful when lending money to first home buyers for the following reasons.

The Savings History.

The Employment History.

How Much Income An Applicant Earns.

Credit History.

The Overall Picture.

Collectively, the information a bank is able to gather about each of these elements will paint an overall picture which gives them sufficient detail to make an accurate commercial decision.

At this stage it is worthwhile clarifying the point that the bank is making a commercial decision, not a personal one. You may think that because you have banked with the same institution for many years that you will receive preferential treatment when you finally lodge your first home loan application. Unfortunately, banks are in the business of making money and are obliged to reach a decision with an eye to making money from you, whilst at the same time fulfilling their role as a resource to the community.

In other words, don't expect that your existing bank will give you favourable treatment if you do not satisfy every element of its lending policy. Remember however that just because you don't qualify for a loan at your own bank that you have reached the end of the road. There are plenty of other banks that could be willing to lend to you, so it is always important to shop around before you make a decision.

But let's take a look at your savings history and why it is so important to a bank's decision-making process.

As stated previously, banks need to develop an accurate picture of every borrower so that a decision can be reached regarding their suitability to receive a home loan approval. The capacity to save money is generally regarded as a good indication of a person's capacity to manage money and is a strong indicator that the added expenses of owning a new home are more likely to be managed properly.

Bear in mind that a bank will be increasingly careful as the loan to value ratio increases.

What is a loan to value ratio?

The loan to value ratio, or LVR, is simply a percentage calculation of the loan amount to the value of the home being purchased. For a loan of $475,000 on a house valued at $500,000, the LVR is 95%. A loan of $400,000 on the same house would have an LVR of 80%.

Under normal circumstances the maximum loan a person can obtain is 95% and at this point every element of the lending criteria must be satisfied and the bank will be unable to exercise any discretion.

So, in a worst-case scenario where a borrower is seeking a 95% loan, the borrower would need to demonstrate savings of 5% of the house value. In the above example where the house was valued at $500,000 this means savings of $25,000. To satisfy the bank's criteria you must have what is termed genuine savings of $25,000.

What does ‘genuine savings’ mean?

To evidence savings, you must provide the lender with a bank account statement for at least the last three months showing an accumulating total. The account must be in the borrower's name and show regular deposits. Other criteria are:

Gifts are generally accepted provided they have been in the account for greater than three months.

Deposits made into accounts from the sale of shares are also acceptable provided the shares have been held in the applicants name for at least three months.

Equity in an existing property is also acceptable as genuine savings provided proof can be shown.

Genuine savings does not include the following:

Sales of assets like cars or furniture etc.

Where you have a significant shareholding but are not prepared to sell the shares. Shares will only be acceptable where they have been sold and the cash deposited into a suitable account.

Some other important points are:

Lump sum deposits of more than 20% of the required genuine savings amount will need to be carefully explained.

Account balances can fluctuate up and down but as long as the required savings target has been reached at the end of a three-month period, the savings will be regarded as acceptable.

If you have more than 5% saved at the start of the three-month period and the balance slowly reduces, the savings policy will still be satisfied provided the final amount still represents 5% of the purchase price.

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