Low doc (low documentation) home loans can benefit people who don’t have access to the level of information banks and lenders often require for your standard home loans. If you are a business owner, contractor, seasonal worker or freelancer, you may not have all the documentation usually required or the employment history often requested. Your income may be irregular, but it may still be high enough and stable enough to make the required repayments.
While low doc loans may be most appropriate for the self employed people, it’s important to note that being self employed does not necessary imply you can only quality for a low doc loan. If your business is older than 2 years, steady and you have all the documentation required for a full doc home loan, it might be possible to meet a lenders criteria for a standard home loan.
After the 2009 GFC, changes to credit regulations and introduction on the National Consumer Credit Protection Act 2009 meant stricter requirements resulting in less people qualifying for this type of loan and many lenders no longer offering low doc loans. This makes it really important to deal with a business or person who thoroughly understands the different lenders’ low doc requirements and approval criteria to avoid ending up with possible entries on your credit history showing multiple loan applications to different lenders in a short period of time.
The low doc loan prior to the 2009 meant exactly that, less documentation and less savings proof but that all changed with the 2009 Global Financial Crisis. Some lenders now call this type of loan, Alt Doc for alternative documentation which is a much more accurate term.
Low doc (or alt doc) loans differ from full doc in the type of information required rather than the volume of information required as lenders are still obliged to understand a borrowers circumstances and ability to meet the repayments.
Examples of alternative documents required for low doc may include:
- Accountant’s signed declaration of your income
- Australian Business Number (ABN) and GST registration
- Business Activity Statements (BAS)
- Business Bank Statements
- Previous tax returns
- Interim financial statements
- Personal bank statements
The reality of a taking out a low doc loan is that you will sometimes pay a higher interest rate as lenders view you as posing a higher risk. The higher the percentage you borrowing compared to your property value (LVR), the higher the interest rate will be. The interest rates can vary greatly between lenders in the range of 1% to 3% (or even more) higher than the full doc variable rate home loan showing how important it is to know what is available in the current market.
It may be possible to obtain a standard interest rate on the low doc home loan should you be in a position where you can place a deposit large enough on the property such that you are borrowing less than 60% of the property value (60% LVR).
Depending on the lender, the usual fees associated with home loans may be higher than on Full Doc loans. You may also find that instead of paying Lenders Mortgage Insurance (LMI), the lender may charge a risk fee when borrowing more than 60% of the property value.
One positive point is that low doc home loans still have the usual home loan features. For example
- Offset accounts
- Ability to make extra repayments
- Split loan
- Interest-only loan