What is a low doc loan?

Co Author: TJ Ryan

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:

Low doc loans are not doc loans

  • 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:

What documents do you need

  • 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 compare some of the low doc loans on offer in Australia using our website.

Learn more about Home Loans

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