Genuine savings can be confusing!
When applying for a home loan, most lenders require you to have 5% of the purchase price in genuine savings.
However, if you currently own a home, it can be difficult to save up a 5% deposit when you’re having to pay your mortgage & bills.
If you’re planning to sell your home before buying the new property, will the bank accept a deposit from a property sale as genuine savings?
What are genuine savings?
Most lenders require genuine savings as evidence that you can make regular financial contributions. This is in turn will reflect your ability to meet your mortgage repayments when your home loan is approved.
The following are considered to be genuine savings:
- 3 months of regular savings.
- A term deposit held for 3 months.
- Shares or managed funds held for 3 months.
- Equity in real estate.
What do banks think about proceeds from a sale?
Many borrowers often get confused about what is and what isn’t genuine savings.
In all other cases (other than a gifted deposit), lump sums aren’t considered to genuine savings.
A deposit from a property sale is the exception to this rule.
The fact that you have experience in making regular mortgage repayments over a few years is evidence of genuine savings.
Have you recently sold your home?
Please call us on 1300 889 743 or fill in our online enquiry form and we can help you qualify for home loan.
Why do some people sell their property first?
When buying a new property, there are four ways to go about about it:
- Sell your existing home first.
- Buy the new home first.
- Organise for a simultaneous settlement.
- Apply for a bridging loan.
Most people that choose to sell first have little to no equity in their property.
As a general rule, this is where you owe more than 80% of the property value.
The other reason that some people opt to sell first is if it’s clear that their property may take some time to sell. This is common in some non-metro locations.
The advantage of this method is that the funds from the sale of your home will be in your account, including the deposit you need for the new property.
You can find more information on the pros and cons of these methods on our page about buying and selling a home.
How much will I get back when I sell my home?
If you originally bought your property for $400,000 and sold it for $600,000 five years later, it doesn’t mean that you’ll be getting $200,000 in your pocket.
There are number of costs involved in selling a property that will affect your final return figure.
Lender settlement fees
You may be charged anywhere between $150 and $400 in administration costs when paying out your existing mortgage.
Real estate agent costs
Real estate agent fees can be anywhere between 2-3% of the sale price.
For a property that’s being sold for $600,000, you could be paying around $18,000 in fees and advertising costs. Of course, that doesn’t take into account agent commission and auction costs.
Conveyancing and solicitors fees can be around $1,500.
Removalists can cost upwards of $150.
These are the costs for minor work that your real estate agent has recommended or that you yourself choose to do to prepare your home for sale.
The costs can vary depending on the condition of the property.
A fresh coat of paint, new carpet, repairing drawers and cabinets and replacing taps and faucets can be relatively cheap.
It’s when you start going crazy on major renovation work that costs can blow out. Worst of all, you likely won’t recoup these costs at sale.
Don’t forget about the costs of buying!
These costs are outside the minimum 5% deposit you’ll need with most lenders.
For an $800,000 property, the costs to complete the purchase can be over $30,000!
This covers such costs as:
- Stamp duty.
- Property title transfer.
- Mortgage registration fee.
- Inspections and valuation reports.
- Home loan application fees.
- Lenders Mortgage Insurance (LMI) if you’re borrowing over 80% of the property value.
What are you actually left with?
From the $200,000 return on the sale, you’ll likely be left with less than $180,000.
However, you still have to buy the new property.
Using the example of an $800,000 property, you’ll have to pay around $30,000 to complete the purchase leaving you with less than $150,000.
In this example, you’ll still have more than the minimum $40,000 deposit you’ll need to buy the new property.
However, it just goes to show you the costs of buying and selling a property.
Bear in mind, this is an example only and takes into costs that may not apply to you or costs that haven’t been taken into account.
Have you recently sold your property?
Whether you’ve sold your property or you’re planning to, give us a call on 1300 889 743 or complete our free assessment form.
We can help you to get approved for your new home loan and give you an estimate of the costs of buying a new property.
In that way, we can set your loan amount in a way that minimises your out-of-pocket costs.