Low Doc Home Loan Rates

What is a low doc home loan?

To secure a home loan, many lenders will require you to show proof of a steady income. For wage earners, this generally presents no issue but if you earn your income in other ways, you may be a candidate for a low doc, or 'low documentation', home loan.

Such loans were introduced by non-bank lenders in the late 1990s to service borrowers who didn't fit the requirements of mainstream lenders. These days, only select lenders provide low doc loans which are generally available to people who may not be able to provide the two years of tax returns or financial records that a standard home loan application requires.

Who are low doc home loans aimed at?

Low doc loans can suit people who don't tick the boxes of earning a regular sum of money month to month. These can include:

• Small- and medium-sized business owners

• The self-employed

• Freelancers

• Sole traders

• Contract workers

• People who earn income through investments

But before you resign yourself to seeking a low doc loan, it's worth researching whether you may be considered for a standard home loan.

Mainstream lenders may be willing to consider your application if you have an established business or have been operating in the same industry - or had the same regular clients - for several years. This can particularly apply to business owners who've paid themselves a regular wage from their businesses.

A mortgage broker may be able to assist you in finding a lender who will consider your application.

How do low doc home loans differ from standard home loans?

There are a few key areas of difference with low doc loans, including:

Interest rates

Generally speaking, low doc home loans come with higher interest rates than standard home loans on the market. This is to compensate lenders for the perceived higher risk that low-doc borrowers may pose.

Most low doc home loans still allow borrowers to choose between variable, fixed, and split interest rate options. Some low doc loans also offer an interest-only option too, but this is less common.

Fees

The standard home loan fees also apply to low doc home loans but can be higher than for normal loans, although this will depend on the lender.

Instead of charging lenders mortgage insurance (LMI), some low doc loan providers might charge a 'risk fee' to cover the added risks associated with approving a low doc loan.

Loan-to-value ratio (LVR) restrictions

Low doc loan providers are less likely to accept borrowers with deposits less than 20%. In fact, some lenders restrict low doc home loans to a maximum LVR of 60%, meaning the borrower would have to come up with a deposit of 40% or more.

The requirements can depend on different lenders' policies and may vary according to the circumstances of individual applicants. In some cases, those who've been in business under the same ABN for more than two years may be able to borrow more.

Loan features

One positive of low doc home loans is that they can still come with the usual home loan features, including:

• 100% offset accounts

• Redraw facilities

• Line of credit options

• The ability to make extra and more frequent repayments.

• Split and interest-only loan options

What documents are required for a low doc home loan?

For people who don't have standard proof of income documentation that mainstream home lenders require, low doc lenders will generally ask to establish proof of income through a combination of the following, depending on individual circumstances:

• Proof of ABN and/or GST registration

• Business Activity Statements (BAS)

• Business Account transaction statements

• Accountant's letter

• Personal tax returns

• Rental income statements

• Dividends or investment returns

Under the National Consumer Credit Protection Act (NCCP) Act, lenders need to carry out income verification before they can approve a loan, so unless borrowers can provide some proof of income, they won't qualify.

Which lenders offer low doc loans?

There are a number of low doc lenders on the market including:

• Reduce Home Loans

• Resi

• Liberty

• Pepper Money

• La Trobe Financial

• Bluestone Mortgages

A mortgage broker specialising in low doc loans may be able to match you up with a loan to best suit your individual circumstances.

Can you refinance a low doc loan?

You can refinance a low doc loan for all the same reasons that many borrowers seek to refinance, such as:

• Switching to a lower interest rate

• Accessing equity in their property

• Taking advantage of better loan features

Ideally, a low doc home loan should be viewed as a shorter-term loan until you are in a position to apply for a regular home loan with a lower interest rate. But to do that, you'll need to show you:

• Have consistently met your loan repayments

• Have maintained a clean credit history

• Can provide tax returns as proof of income

Of course, switching loans will come with the usual fees and expenses associated with refinancing, so you'll need to weigh up the pros and cons of refinancing. However, as a general rule, switching to a standard home loan could potentially save you thousands of dollars in interest over the course of your home loan.

See also: Refinance Home Loan Calculator

Savings.com.au's two cents

Low doc home loans are a useful loan product for the self-employed and irregular income earners looking to enter the property market. However - beware - some borrowers can get stuck paying higher interest rates for the life of their home loan.

Make sure you exhaust the avenues of pursuing a standard home loan before going down the path of applying for a low doc loan. A mortgage broker may be able to help you find a standard lender who is willing to consider your individual circumstances.

If taking out a low doc loan is your only option, ensure you are meticulous in making your regular repayments and maintaining a good credit record. This may equip you to refinance to a standard home loan further down the track.