Low Doc Loans Home Loan
Low Documentation (low doc) Loans were introduced in the late 1990’s to provide finance solutions to people who could not fully verify their income with supporting documentation.
Low doc home loans have accounted for approximately 20% of all loans generated by early 2010. Low doc loans have become high demand by self employed borrowers who cannot supply their tax returns for many reasons. These reasons include, not having one’s financial records prepared at the time of applying for a loan, having complex financial structures with many paper write off expenses, having income streams which were only seasonal, and a business income which consisted of large amounts of cash income which were not reflected in a person’s financials.
Many brokers and financial institutions tend to refer to Low Doc or Lo Doc loans not as a loan product, but rather a loan policy. This is because many lenders are treating these types of loans similar in pricing to and assessment to full doc loans.
What is low doc home loan?
A low doc home loan is a loan product or policy which requires less income paper work than a normal type of loan. When you borrow money from a lending institution for the purpose of residential property or consumer purpose use, the lender has to conduct an affordability test (serviceability). With a low doc loan, the lender uses a declaration of income made by the borrower to conduct an affordability test. This declaration of income document is a template provided by the lender within the loan application. The borrower completes this form and records their income declaration.
As an example, if a borrower states his income at $90,000p.a. on a low doc declaration, then that is the figure the lender uses to determine his borrowing capacity when assessing a loan he has applied for.
However, post 2008, and the advent of the global financial crisis, some lenders have asked for low doc loans to be supported with Business Activity Statements. This has become known as Low Doc with BAS. In this case, the lenders use the previous 4 quarterly business activity statements to determine the turnover of a person’s business. After determining the previous 4 quarters income turnover, lenders assume the client’s income to be no more than 50% of the gross turns over of the business.
When lenders consider a person’s income without the need for Business Activity Statements, the process is then known as a Low Doc loan without BAS. This is the more popular of the 2 options currently available.
Is a Low Doc Loan more Expensive?
When low doc loans were first introduced, they were more expensive than the normal loan. Initially low doc loans were usually 1% higher than the standard variable loans. This began to change in early 2003 when lenders began to realize this market was quite significant and wanted market share. Hence lenders began to compete for this type of business and began to offer discounts to attract these customers. This includes Professional Package Mortgage Loans with considerable discounts. With many lenders, there is almost no difference in the interest rate between a fully documented loan and a low doc loan.
In most cases, Low doc loans also attract Lenders Mortgage Insurance (LMI) where the Loan to Valuation Ratio (LVR) exceeds 60%. The LMI premium for a Low doc loan is worked out using a sliding scale. The higher the LVR, the higher the premium calculation. However, there are instances and lenders that do not charge Lenders Mortgage Insurance on low doc loans. This is especially such when the LVR is below 60%. To get an idea of the cost of LMI, we invite you to use our LMI comparison calculator.
Low Doc up to 80% LVR without LMI?
There are lenders who lend up to 80% LVR, and do not charge any LMI. In this case, the rate is more higher than most conventional low doc loans. You will find that the low doc lender is what is commonly referred to as a non conforming lender.
Maximum LVR Low Doc Home Loan?
The maximum LVR for a residential low doc home loan is 85% LVR up to $1million. As at 80% LVR, many lenders can lend you up to $2million. If you were to look at at an 60% LVR you could increase the borrowing limit to $4,000,000.
If a client has multiple properties or securities, then we could place different properties with different lenders to gain maximum exposure under Low Doc Policy.
Can I borrow over 80%LVR on low doc home loan?
This policy is commonly referred to as low doc over 80% LVR. This possible with 2 lenders in Australia in 2013. The maximum LVR one can borrow with a low doc loan is 85% LVR.
It is worth noting that the criteria for this type of loan are very stringent. For example, the lender requires that a borrowers ABN be registered for GST for more than 2 year’s, and also has clean credit. The interest rate in this is much more expensive than a low doc loan which is under 80% LVR.
What kinds of loan products are available with a Low Doc Loan?
Low doc loans can be raised in all type of loans. These include;
- Low Doc Honeymoon Loans,
- Low Doc Basic Loans,
- Low Doc Lines of Credit,
- Low Doc Professional Package Loans,
- Low Doc Fixed Loans,
- Low Doc Standard Variable Loans,
- Low Doc 100% Offset Loan,
- Low Doc Construction,
- Low Doc Business Loans,
- Low Doc Commercial loans
Can I have a Low Doc Loan in the name of a Company or a trust?
Low doc loans can be done in the names of companies, various types of trusts, and individual names.
It is worth noting that not all lenders will take on low doc loans in the name of a company or trust. Some lenders will possibly lend in the name of a company, but not a trust. For other lenders, they will do the complete opposite and do a low doc loan in the name of a trust and not a company.
The consultants at Mortgage Providers can help structure a low doc loan which mirrors the cost of a full doc loan without the need to show any form of documentation.