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Low documentation (low doc) loans, otherwise known as alt doc loans, cater to borrowers who don’t have their financials up to date or have failed to lodge their recent tax returns. There’s no shortage of misconceptions surrounding this type of loan, so here are the facts behind the commonly held myths.
1. Documentation is required
Low doc lows sometimes get confused with no doc loans, which require minimal financial application documents. No doc loans were phased out by most lenders following the global financial crisis and the tightening of lending criteria that accompanied the Australian government’s introduction of the National Consumer Credit Protection Act 2009.
While the name ‘low doc’ suggests fewer documents, borrowers who apply for these loans may be surprised by the number of documents needed. The difference between full documentation loans and low doc loans is not so much in the volume of financial information required but in the type of information.
Lenders are required to take reasonable steps to verify a borrower’s circumstances and declared income, which means that in the absence of tax returns you will be asked to supply other forms of alternative income documentation. While each lender has their own requirements and will accept different document types to prove your income, typical examples include:
- a signed accountant’s declaration of your income
- evidence of your Australian Business Number (ABN) registration
- proof of GST registration
- Business Activity Statements (BAS)
- business bank statements
- old tax returns
- interim financial statements.
Some lenders may require evidence of an ABN, BAS and GST for a minimum of two years; others need less. You’ll also have to complete a low-doc application form and disclose your assets and liabilities.
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2. Lenders take a big picture approach
Your credit file and repayment history of debts will be of interest to lenders. As with any home loan application, there are multiple factors which determine a lenders’ decision about the success of your low doc application. Lenders will look more favourably on applicants with a good credit rating who can demonstrate a reasonable asset to income ratio and whose property is perceived as easy to sell.
3. You can be self-employed and not have a low doc loan
On its own, being self-employed does not mean you must have a low doc loan. It’s true these loans were initially designed for self-employed and small business owners who may not have access to the financials and tax returns usually required when applying for a home loan, but this doesn’t apply to all self-employed. If you do have these documents available for assessment, then you should be eligible for a full doc loan.
What can put you in low doc territory is being in short-term self-employment, not having your tax returns available, or lacking a strong record of financial management. Self-employment can be less of an issue if you’re buying as a couple and one person has a permanent job. However, if you both own a business together, for example, that can make the loan application more complex.
4. Interest rates are usually higher
The reality of a taking out a low doc loan is that you will probably pay a higher interest rate as lenders view you as posing a higher risk of being unable to pay your mortgage back. The higher the percentage of your property value that you’re borrowing, the higher the interest rate will be.
There are exceptions where sometimes the interest rates of loc doc loans from individual lenders may be comparable to standard mortgage interest rates. Lenders assess their risk appetite based on numerous factors including the size of your deposit, the supporting documentation you supply, your assets and your credit history.
Of course, interest rates are not the only important factor when assessing a loan. To get a full picture of how well it suits your needs, check out its comparison rate, fees and features, as well as talk to a mortgage broker.
5. Low docs represent a small portion of loans
Many banks have removed their low doc products for all homeowner, investment loan and line of credit applications or made them available only under strict criteria.
It’s still possible to find non-banks lenders who allow low-doc loans for property purchases, but more difficult to find ones willing to refinance an existing low doc loan or existing investment loan. Low-doc loans for equity release, companies and trusts, and construction are also becoming increasingly scarce.
Not sure whether you qualify for a low doc or full doc loan? Advice from a trusted and experienced Yellow Brick Road mortgage broker will give you a clear picture.