A recent report by consumer finance ratings company, Canstar, suggested that low-doc lending is “thriving” after a period of unpopularity following the Global Financial Crisis. But what exactly is a low-doc home loan? Here’s an overview including advantages, disadvantages and the things you need to know about the application process.
Low-doc home loans
A low-doc (low-documentation) home loan is designed for borrowers who can′t supply the required amount of documentation to obtain a traditional mortgage. This is typically individuals who are self-employed or engaged in contract work.
Low-doc home loans look at a borrower′s overall ability to service a loan, rather than simply ticking off a documentation checklist.
First introduced in Australia in the late 90s by non-bank lenders, predominantly mortgage brokers, low-doc home loans have continued to grow in popularity and most banks now offer a number of options to choose from.
The key benefits of a low-doc home loan are:
• Ideally suited to self-employed and contract workers – in the past, supplying proof of income posed a road block to securing a traditional loan and purchasing your first home. Low-doc home loans are a great way for self-employed and contract workers to get into the property market
• Access to other loans – Some lenders allow low-doc home loans to be used for a variety of other purposes, such as a car loan.
Whilst having to supply less paperwork is an advantage, the lack thereof poses an increased risk to lenders resulting in the main disadvantages:
• Higher interest rates – Canstar’s analysis found that on average, a standard variable low-doc loan is 0.53% higher than a standard variable loan. For a 3-year fixed loan, interest rates are on average 0.41% higher
• Higher fees – Canstar’s analysis found that on average, ongoing and discharge fees are up to $40 extra; whilst the upfront fees are, on average, $337 extra (based on a $350,000 residential home loan at 60% loan to value ratio). Upfront fees include legal, documentation, application and settlement fees.
Submitting an application
In addition to the advantages and disadvantages of a low-doc home loan, you also need to consider some of the associated stipulations:
• You need to have been self-employed in the same industry for at least one year
• The maximum amount you can borrow is 80% of the property value
• If you are borrowing more than 60% of the property value, Lender′s Mortgage Insurance will apply
Once you’re ready to apply for a low-doc home loan, the following documents are usually required to be supplied:
• Signed Borrower’s Income Declaration
• Registered business name, ABN and/or Certificate of Incorporation
• Business Activity Statements for the last 12 consecutive months
• Confirmation your business has been registered for GST for at least 12 months
Ready to apply for a low-doc home loan?
Contact us today to meet with a mortgage broker who will find the best interest rate for you.