Low Doc Loans with BAS
Low doc loans were originally set up in early 2000 for self employed borrowers who could verify their incomes. The tradition behind low doc loans was for people who either had not completed their financials for the previous financial year, or their financial statements were so complicated that it was better for a person to do an income declaration on an affordability statement supplied by the lender than to demonstrate Affordability (serviceability) using his current financials.
Post 2008 with the advent of the Global Financial Crisis, lenders began to take it upon themselves to verify a client’s income declaration using BAS or Business Activity Statements. This was mainly brought about by the level of exposure of lenders to clients who had low doc loans. The cost of funds for a bank was more expensive for low doc loan client. This comes from the fact that low doc loans are viewed as Sub Prime by funders, and they carried risks as a client’s financial affordability was not verified.
Before 2008, as long as a client had an ABN or declared an income below the ABN requirement threshold of $75,000, then a client was able to apply for a low doc loan. The requirements mainly worked on the following basis:
- If income declaration was below $75,000, then no supporting ABN was required
- If income declaration was over $75,000, then a client would need to show they had an ABN
- Client was to have an ABN in personal name, Company Name or Partnership name
What is Low Doc with BAS (Business Activity Statements)
Low doc loans with BAS (Business Activity Statements) emerged in late 2008. The basic rule behind them was to allow lenders to verify a client’s income declaration he/she made on an affordability statement. This came about because Lenders Mortgage Insurers began making hefty payouts to lenders on loans which were low doc. It was found that low doc loans were going to be hit hardest by the Global Financial Crisis of 2008, and the cost of funds was becoming higher for lenders. Many people who were falling into arrears and many foreclosures were low doc loans after the global financial crisis of 2008.
Further, in January 2011 with the advent of the NCCP (National Consumer Credit Protection Act), and the Responsible Lending guidelines, lenders were forced to undertake more in depth affordability verification before advancing a low doc loan. Hence lenders sought to verify an income declaration using BAS (business activity statements) to confirm an income declaration.
How does a low doc loan with BAS work?
During assessment for Affordability under low doc loan with BAS, a lender will look at the client’s income declaration which has been supplied in the application. If a client were to declare an income then that would need to be verified by looking at the client’s turnover of his business.
As a guide, most lenders will look at the previous 4 quarter’s BAS turnover. Each quarter’s turnover will be added up to produce a gross annual turnover for the previous 4 quarters. in early 2011, most lenders used the 40% turn over rule. Today in 2013, most lenders will look at the gross annual turnover using the 50% rule. Basically what this means is that, for example, if a person had a gross turnover of $220,000p.a., then a lender will consider a maximum of 50% of the gross turnover to be a declared income. So in this case, a lender will assume that the client’s maximum income will be $110,000.
Assessment methods for Low Doc with BAS Loans
It is worth mentioning that not all lenders use the 50% income declaration rule for a low doc with BAS Loan. Some lenders have gone as far as segmenting different professions and making different brackets for assessing that person’s self employed field using a with BAS low doc policy. As an example people who work in property sales roles come under a formula of 70%, health care professionals like physiotherapists, chiropractors at 63%, construction at 51%, cafes and restaurant owners at 32% etc.
The above highlights, and is a small example, that the 50% rule can be used as a guide but is not always the most useful rule as other formulas can be more flexible or detrimental in particular scenarios.
At Mortgage Providers, our consultants are all Low Doc loans specialists. We know where to find the cheapest low doc loan with BAS coupled with the most flexible credit policy to allow a smooth assessment making a loan application easy.