If you’re self-employed or a full-time investor, you might not be able to prove your income through traditional means – but there are ways you can borrow and continue to buy property.
The term ‘low-doc’ lending – or low-documentation loans – may seem pretty self-explanatory, but it is a concept, and a practice, shrouded in misunderstandings and misconceptions.
The confusion around low-doc loans, how they work, how secure they are and whether or not they constitute a ‘responsible’ way to borrow money was largely exacerbated by the advent of the global financial crisis (GFC) and irresponsible lending practices in other countries across the globe.
It’s important to understand that ‘low-doc lending’ does not mean ‘no-doc lending’ – borrowers do still need various documents, and to meet certain criteria, to get their applications across the line. It’s also not lending for the lazy and disorganised – those who simply can’t be bothered to gather the necessary documentation.
Low-doc home loans are a flexible lending solution for people such as freelancers, contractors and full-time investors, who may otherwise have been shut out of the market simply because they don’t conform to traditional lending criteria.
Indeed, some lenders who cater to this segment of the borrowing market have moved to incorporate what was traditionally known as ‘low-doc lending’ into their suite of ‘specialist lending’ products.
The term ‘specialist lending’ perhaps has less negative connotations relating to irresponsible lending, higher interest rates and a difficult application process.
Low-doc lending can also be referred to as ‘alt-doc’ (or alternative documentation) – which points to the fact that it still requires paperwork and proof, just slightly different to that which you’d provide for a standard home loan.
Who can get low-doc loans?
Low-doc lending caters to those people who, for various reasons, have difficulty getting the documentation together that they would require qualifying for a traditional home loan.
Low-doc loans are widely used by people who are self-employed and small business owners. Self-employed borrowers may not have all the traditional proof of income documentation (such as financial statements and tax returns), but they could well be earning a solid, stable income and be a worthy recipient of a home loan.
Borrowers who need specialist and low-doc loans are everywhere – particularly when you consider that 17.2 per cent of the Australian workforce is self-employed.
Drilled down further, research by the Independent Contractors of Australia indicates that there are 1.1 million self-employed Australians who do not employ anyone and a further 1 million who do employ others.
Borrowers looking to obtain a low-doc loan still need to meet certain criteria, which will differ between lenders. They often have to self-certify their income, confirm their employment status (usually with a registered Australian Business Number or accountant’s letter) and have a clean credit history/good repayment record.
Where can I get a low-doc loan?
Various banks and lending institutions offer low-doc loans to prospective homeowners and investors – including CBA, Westpac, ANZ, St George, RAMS, Adelaide Bank, Pepper, Resi and State Custodians – but it’s important to do your own research and due diligence into these options as lenders’ policies, criteria and product offerings frequently change.
Each lender will have different lending criteria, cater to different borrowers, and have products with varying fees, terms and conditions, rates and features.
It is therefore crucial for prospective homeowners or investors who are considering a low-doc loan to investigate the eligibility criteria for a loan before beginning the application process.
Many low-doc and specialist borrowers prefer to engage the services of a mortgage broker who can find them a lender and a loan that suits their needs.
New legislation introduced in 2009, the National Consumer Credit Protection Act, put extra pressure on lenders and mortgage brokers to make ‘reasonable enquiries’ into your financial situation and ensure you’re placed into a loan that is ‘not unsuitable’.
Depending on the lender and product you’re applying for, you may be required to provide one or more of the following to demonstrate your ability to repay the low-doc loan.
Business Activity Statement (BAS): A year’s worth of activity statements can assist your lender in verifying your turnover, and thus the stability of your cash flow and how likely you are to be able to afford the loan.
Previous bank statements: Lenders may require you to provide business or personal bank statements back as far as six months to verify your savings, cash flow and repayment ability.
Self-verified income declaration: The self-verified income declaration is provided in lieu of payslips or tax returns. This involves signing a statement declaring your income and verifying that you can in fact afford the loan.
Registered business name and Australian Business Number (ABN): As low-doc loans often cater to the self-employed, lenders often require information about your business operations.
Accountant’s letter: A letter from your accountant can help solidify your income claims and further prove your ability to pay the loan back.
Do low-doc loans cost more than traditional home loans?
Low-doc loans often come with a certain stigma attached, particularly when it comes to pricing.
In recent years, however, low-doc and specialist loans have become increasingly affordable as banks and lenders look to tap into this market.
Interest rates on low-doc loans are generally quite competitive with those offered on standard loans, but there may be fewer discounts and special offers available. In addition, a slightly higher interest rate may be charged to compensate the lender for the additional risk this form of lending presents.
Borrowers requiring a low-doc loan might also need to save up a larger deposit as loan-to-value ratios can be stricter. This could mean low-doc borrowers have to wait longer before getting their loan; however, it does mean they will ultimately pay less in interest over the course of the loan due to the smaller borrowings.
In most cases, the ‘features’ offered on a low-doc home loan will be the same as those included in full documentation loans.
Low-doc loans also have different requirements when it comes to lender’s mortgage insurance (LMI). Where traditional loans may require borrowers take out LMI for loan-to-value ratios of 80 per cent and upwards, low-doc loans frequently dictate that anyone borrowing 60 per cent or more of the value of the property also pay LMI. This is to further protect the lender.
Can property investors benefit from low-doc loans?
For those investors who have moved away from working full-time, or largely rely on their investments to provide their income, low-doc loans can be a handy solution.
These investors may not have a regular or consistent income and their employment history might not be immediately appealing to lenders – but they may well have consistent cash flow and the ability to easily service an additional loan.
The income generated from your existing investment properties (or other investment vehicles) won’t appear on your business activity statement (BAS), so make sure you have adequate proof of income from your various sources.
Many investment experts recommend that property investors with a multi-property portfolio diversify their loans and spread them between various lenders to avoid hitting a serviceability wall and ensure they’re tapping into the best features, offers and discounts available in the marketplace.
It is of course important for investors to do their due diligence in this area and ensure that the loan and lender is suitable for their financial circumstances – but also for the wider goals of their property portfolio.
Some low-doc home loans will not allow you to purchase property in particular areas. These areas may be deemed ‘high risk’ due to their high price tag or potential for a price downturn, and are categorised as such to reduce the lender’s risk.
Ensure you’ve done adequate research on the lender, loan product, property and location before you go through the process of applying for a low-doc loan to optimise your chances of success.