Low Doc Home Loans
If you are self-employed, you may be considering a low-doc home loan. Here’s what you should know.
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With the gig economy booming in Australia, more people are self-employed, freelancing and running their own businesses than ever before. However, traditional lending applications and their income criteria are not always able to accurately capture these fluid income arrangements. If you're looking for a mortgage and have a non-standard income, you might want to consider a low-doc home loan.
What is a low-doc home loan?
When low-doc home loans first came onto the market, over a decade ago, lenders were willing to lend money without proof of income. It was a little bit risky because they couldn’t do all the usual financial checks to protect themselves against defaults, so they charged higher interest rates.
After the global financial crisis in 2010, the Australian government introduced responsible lending laws and financial checks became a lot stricter. The banks changed the low-doc criteria so that instead of accepting fewer documents, they would accept alternative documents.
How is a low-doc home loan different from a standard home loan?
A low-doc home loan has many of the same features and options as a regular home loan. You can choose a fixed, variable or split interest rate as well as interest-only options. Many lenders will also offer redraws and offset accounts and will give you the option to make extra repayments on a low-doc loan.
However, there are a few important differences:
Lower borrowing limits
Most lenders will only allow you to borrow up to $1m on a low-doc contract. A few may let you borrow $2.5m, but they are rare.
Higher deposits
Though the average home loan deposit is 20%, on a low-doc loan, many lenders insist that you have a deposit of 40%. If you don’t, then you may be forced to get lender’s mortgage insurance. If you have less than 20%, some lenders will refuse to give you a loan at all, even with insurance.
Higher interest rates
Interest rates are usually higher for low-doc home loans. Most lenders don’t display low-doc rates on their websites, preferring to assess each application on an individual basis, but estimates suggest that they are around 0.5% to 1% higher than the interest on regular loans.
Location limitations
Low-doc lenders sometimes have restrictions on the type of property the loan covers. Many will only issue loans on urban properties, which means that if you’re trying to buy in a rural area, your application may be rejected.
Where can I get a low-doc home loan?
Almost all lenders offer some type of low-doc home loan. Some have specific low-doc products, while others offer low-doc options on their standard loans. When you’re looking up the document requirements for a loan application, there is usually a section that describes which documents a self-employed person needs to provide.
Who can apply for a low-doc home loan?
Low-doc home loans are mainly used by people who are self-employed and small business owners. Because they don’t have payslips and PAYG statements to prove their income, lenders will accept a different set of documents to assess their loan applications.
What documents will I need?
- You will need to provide your ID and details of your assets, expenses, and any existing liabilities.
- Depending on how long you have been self-employed, your bank can ask for any combination of the following documents as proof of income:
- Personal and business tax returns and income assessments for the past two years
- Business Activity Statement certified by the ATO
- Bank statements going back six months
- ABN registration information
- GST registration if you earn over $75K a year
- A certified document, signed by you, declaring your income
- A letter from your accountant
