Low doc loans a lifeline for self-employed – what's the catch?

Do self-employed or contract workers pay more for a home loan?

Low doc loans have long been the lifeline of self-employed entrepreneurs and sole traders who find themselves unable to take the traditional mortgage route. And with more than 3.3 million people now running their own business in 2016 according to the ABS, there is a growing multitude of Aussies who may one day dream of buying a house with a low doc loan.

But does taking the low road (low doc, that is) mean you have to pay more to get into the property market?

This year, financial research and ratings organisation Canstar has compared 58 low doc loans from 14 lenders to determine which ones offer outstanding value. The latest results show buying a house doesn’t have to be out of reach, with many home loans on offer for self-employed people.

 

Low Doc Home Loans

The price of risk

Low doc property loans are loans available to potential borrowers who can’t supply the amount of documentation required to obtain a traditional mortgage. But this lack of documentation poses an increased risk to lenders, so their low doc products are priced accordingly and can be a little more expensive than a standard loan.

Differences in Interest Rates

Canstar’s analysis has found that on average, a standard variable, residential low doc loan will be 0.63% more than the non-low-doc home loan. For a 3-year fixed residential home loan, the difference between the average low doc and non-low-doc being 0.45%.

Residential Home Loans: Interest Rates
  Standard Variable Low Doc
Standard Variable
3-Year Fixed Low Doc
3-Year Fixed
Min 3.55% 4.59% 3.59% 4.05%
Average 4.58% 5.22% 4.08% 4.67%
Max 5.84% 6.86% 5.05% 5.54%
Source: Products on Canstar database as at 15 August 2016. Based on Residential Home Loan with $350,000 loan amount and 60% LVR.

 

These differences are also present if you’re a self-employed property investor, with the following differences between the average of standard variable investment loans:

Investment Home Loans: Interest Rates
  Standard Variable Low Doc
Standard Variable
3 Year Fixed Low Doc
3 Year Fixed
Min 3.79% 4.59% 3.69% 4.19%
Average 4.79% 5.29% 4.32% 4.71%
Max 5.82% 7.29% 5.30% 5.54%
Source: Products on Canstar database as at 15 August 2016. Based on Investment Home Loan with $350,000 loan amount and 60% LVR.

 

 

Differences in Fees

In addition to a premium on the average interest rate, low doc home loans also tend to charge higher fees than standard home loans. One notable exception is ongoing fees, which are on average cheaper for low doc loans.

For variable rate loans, average discharge fees are only around $50 extra for low doc loans. It’s the upfront fees than are steep for low doc loans – on average $331 extra on a variable rate loan or $344 extra on a 3-year fixed rate loan. Upfront fees include legal, documentation, application and settlement fees.

Residential Home Loans: Fees
  Standard Variable Low Doc
Standard Variable
3 Year Fixed Low Doc
3 Year Fixed
Upfront Fees $434 $765 $453 $797
Ongoing Fees $123/year $100/year $142/year $136/year
Discharge Fees $242 $293 $257 $323
Source: Products on Canstar database as at 1 June 2016. Based on Residential Home Loan with 60% LVR and $350,000 loan amount.

 

And again, Canstar found these differences to be equally prevalent for self-employed property investors:

Investment Home Loans: Fees
  Standard Variable Low Doc
Standard Variable
3-Year Fixed Low Doc
3-Year Fixed
Upfront Fees $416 $776 $442 $822
Ongoing Fees $136/year $105/year $153/year $136/year
Discharge Fees $253 $293 $264 $323
Source: Products on Canstar database as at 1 June 2016. Based on Investment Home Loan with 60% LVR and $350,000 loan amount.

 

Low Doc Loans

“The onset of the GFC decimated the low doc loans market. In 2009, we researched 109 of these loans provided by 30 lenders – by 2010 ASIC advised that low doc loans were just 0.70% of residential lending. This year we are researching 59 loans from 14 lenders,” said Canstar Research Manager, Mitchell Watson.Mitchell Watson, Group Executive for Ratings and Financial Services

“While there is an interest rate margin between a standard and a low doc home loan, it’s a margin of only around 50 basis points, which is not excessive. And certainly low doc loans are a terrific lifeline for the self-employed.”

 

Canstar’s research also found that some lenders allow low doc home loans to be used for a variety of other purposes, as follows:

Loan Purpose Availability
Loan Purposes Institutions
Personal Use
(This is what most borrowers
use the loan for, i.e. buying a
residential property.)
AMO Group

ANZ

Bank of Melbourne

BankSA

BOQ

Commonwealth Bank

Homeloans

Liberty Financial

Pepper Money

RAMS

RESI Mortgage Corp

St George Bank

State Custodians

Westpac

Business Purpose ANZ

Homeloans

RAMS

State Custodians

Westpac

Refinancing AMO Group

ANZ

BOQ

Commonwealth Bank

Liberty Financial

Pepper Money

RAMS

RESI Mortgage Corp

State Custodians

Westpac

Share Purchase AMO Group

ANZ

BOQ

Commonwealth Bank

Liberty Financial

Pepper Money

RAMS

State Custodians

Westpac

Consolidate Debt AMO Group

BOQ

Commonwealth Bank

Liberty Financial

Pepper Money

RAMS

State Custodians

Westpac

Equity Release AMO Group

ANZ

BOQ

Commonwealth Bank

Liberty Financial

Pepper Money

RAMS

State Custodians

Westpac

Repay ATO Debt State Custodians
Repay Business Debt RAMS

State Custodians

Source: www.canstar.com.au

 

Which providers offer outstanding value low doc loans?

Canstar is pleased to announce there are five-star low doc loan products available across the following categories:

2016 Canstar Low Doc Loans winners

 

 

Source: Australian Taxation Office (ATO)

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