Compare Low Doc Home Loans

The 2016 Low Doc Star Ratings report is a guide for the Self Employed Australian.  The report compares 56 loans across 14 institutions.

 

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Being self-employed or a contract worker gives you a certain amount of freedom but with it comes a unique frustration: proof of income when you want to buy a home.

In the past a home loan from the banks was simply not an option unless you could tick all the boxes – maximum assets, minimum liabilities, and proof of stable long-term income.

Luckily for Australia’s entrepreneurs, low doc loans bridge the gap between proof of income and home ownership. And we certainly have a lot of self-employed people here, with a whopping 1.2 million sole traders and 2.1 million business owners with employees (ABS, 2016).

Originally created by mortgage brokers, the low doc loan changed how self-employed borrowers were viewed by lenders, by looking at a borrower’s overall ability to service a loan rather than simply ticking off a documentation checklist.

What is a low doc loan?

Low doc loans are home loans available to potential borrowers who can’t supply the amount of documentation required to obtain a traditional mortgage. The low doc loan is largely the domain of the self-employed and contract worker.

Until low doc loans came along, home ownership for the self-employed was a difficult proposition. A person working for him or herself has no PAYG payslips records, often has a fluctuating income and perhaps their business activity statement (BAS) doesn’t look as solid as a bank would want. With some lenders, self-employed borrowers still have to provide at least two years personal tax returns, in-depth profit and loss statements, and an accountant’s letter supporting their financial position.

Low doc property loans first appeared on the Australian lending landscape in the late 1990s. Introduced by non-bank lenders, predominantly mortgage brokers, they tapped into a niche market that was excluded from mainstream borrowing. This push by non-bank lenders essentially opened up a viable way for self-employed people to buy a house, as they allow for self-employed people to provide different kinds of documentation to a normal borrower to prove their ability to repay the loan.

However, because of its nature, low doc loans often force borrowers to pay a bigger deposit and higher interest rates.

The continued demand for low doc loans over the years has seen it transition from niche market to a mainstream product, with most banks now joining the brokers in offering a number of low doc home loan products as part of their lending portfolios.

These days, lenders cater for a mix of documentation and self-certification from potential low doc borrowers.

Low doc loans are not no doc loans

It’s important to realise that low doc is just that – a loan that requires less documentation of regular income and assets that outweigh liabilities in the eyes of a lender. Low doc still does have certain requirements such as:

  • A borrower with a clean credit history.
  • Maximum borrowing of 80% of the property’s purchase price. If you wish to avoid Lender’s Mortgage Insurance (LMI), you will generally only be able to borrow a maximum of 60%.
  • Full property valuations.
  • No second mortgage on the property.
  • Self-employed for at least 1 year (some lenders require 2 years).

What documents do you need for a low doc loan?

When applying for a low doc home loan, some lenders only require a minimum of 2 documents, which may include documents such as the following:

  • A signed Borrower’s Income Declaration stating your usual income
  • Your registered business name
  • Your Australian Business Number (ABN)
  • Your Business Activity Statements (BAS) for the last 12 months
  • You may need to confirm that you have been registered for GST for at least 12 months

It’s worth doing your sums before jumping in, though. The levels of risk involved in lending large sums of money to low doc and no-doc applicants are reflected in the increased cost charged in terms of interest rates and fees.

In 2016, CANSTAR has researched and rated 58 loans from 14 lenders to determine which ones offer outstanding value, and the results show there is a wide range of options on offer. You can find out more about low doc loans with our star ratings report, or compare the low doc loans on offer in Australia using our website.

What can I use a low doc loan for?

Loan Purpose

Companies

Available to repay ATO debt State Custodians

Pepper

Available to repay business debt State Custodians

RAMS

Pepper

Homeloans

Available to consolidate debt Westpac

AMO Group

Commonwealth Bank

HSBC

iMortgage

BOQ

RESI Mortgage Corp

State Custodians

RAMS

Homeloans

Liberty

Pepper

Available for equity release Westpac

ANZ

AMO Group

Commonwealth Bank

HSBC

BOQ

NAB(exclusive to brokers)

RESI Mortgage Corp

State Custodians

RAMS

Liberty

Pepper

Available for business use ANZ

HSBC

Bank of Melbourne

BankSA

St George Bank

Homeloans

Westpac

RESI Mortgage Corp

State custodians

RAMS

pepper

Available for refinancing Westpac

ANZ

AMO Group

Commonwealth Bank

HSBC

iMortgage

BOQ

Homeloans

RESI Mortgage Corp

State Custodians

RAMS

Liberty

Pepper

Available for share purchase Westpac

ANZ

AMO group

Commonwealth Bank

BOQ

RESI Mortgage Corp

State Custodians

RAMS

Liberty

Pepper

Source: Canstar. Based on information provided to Canstar from the financial institutions surveyd for the 2015 Low Doc Loans ratings report. Correct at time of writing.

Lending to those who are self-employed and who likely have fluctuating incomes, though, does represent a higher level of risk for financial institutions. These increased levels of risk involved in lending large sums of money to low-doc applicants are reflected in an increased interest rate charged, as well as added fees.

What interest rate do low doc home loans charge?

This year CANSTAR has researched 59 low doc home loans from 18  lenders and compared these loans to the hundreds of standard home loans on our database. At time of writing, and on average, a standard variable low-doc loan will be 0.53% more than a full documentation loan. The average difference between the two is 0.41% if we look at a 3-year fixed loan.

Difference between low doc loan and standard loan interest rate

 

Standard Variable

Standard Low Doc Variable

3 Year Fixed

Low Doc 3 Year Fixed

Min

3.99%

4.58%

3.99%

4.49%

Max

5.99%

7.25%

5.59%

5.93%

Average

4.90%

5.43%

4.53%

4.94%

Source: www.canstar.com.au Interest rates are as at 15/07/2015

 

What fees do low doc home loans charge?

In addition to a premium on the average interest rate, low doc home loans also tend to charge higher fees than standard home loans. On average, ongoing and discharge fees are less than $40 extra, but it?s the upfront fees than are steep – on average $337 extra on a $350,000 residential home loan at 60% LVR (loan to value ratio). Upfront fees include legal, documentation, application and settlement fees.

Difference between low doc loan and standard loan fees

  Variable Standard Home Loan – average fees Variable Low Doc Home Loan – average fees
Upfront Fees $472 $809
Ongoing Fees $119 $132
Discharge Fees $263 $297

Please note for Standard variable home loans the fees are based on Residential Home loan, 80% LVR and $350,000 loan amount. Variable Low Doc Loans are based on Residential Home Loan, 60% LVR and $350,000 loan amount.