What is a low doc loan?
A Low Doc Loan is an otherwise normal home or investment loan that does not require the normal income verification such as tax returns, financial statements or payslips.
Instead of providing these documents the lender will ask you to sign a form called an income declaration on which you state your income. The lender then uses your stated income in their assessment.
Are low doc loans only for the self employed?
The reason why lenders only accept self employed borrowers is that there are legitimate reasons why they may not be able to prove their income, such as not having completed a recent tax return. For a PAYG borrower there are far fewer legitimate reasons, so lenders ask why they would not provide their payslips as proof of income!
Do I need to tell my lender about my assets & liabilities?
Yes, with most lenders you will need to provide a detailed assets and liabilities (A&L) statement. Some lenders, such as ANZ, even include this on their income declaration form.
Lenders look to make sure that your income, age, assets and liabilities all match up. For example, a 50 year old with a declared income of $300,000 p.a. but with few assets would raise eyebrows!
What is the difference between a low doc and a no doc?
Typically, with a No Doc Loan you will not need to provide the full details of your assets and liabilities, nor will you have to declare your income!
Although there is variation between lenders, you will normally just sign a declaration confirming that you believe you can afford the indicative loan repayments.
No Doc lending is usually the domain of expensive private lenders that also do not care about your credit history. Rates for these private lenders can range from 2% to 6% per month, which is up to 72% p.a.! Unfortunately that was not a typo!
However, there are one or two lenders that are “Prime” No Doc lenders, which will not charge a higher rate than their normal Low Doc Loans. These lenders will do a credit check, investigate the repayment history on your current loan and will usually not consider any defaults.
No doc loans must not be regulated by the NCCP act. This means that they must be predominately for business or investment purposes. Note that investment in residential real estate is considered to be regulated so is not accepted for a no doc loan unless the borrower is a company or a trust.
Typically the cheapest and best No Doc Lenders will lend up to 75% of the value of your property.
What does LVR mean and how does it affect the price of my loan?
LVR is short for Loan to Value Ratio. The LVR is used by lenders to determine the risk of your loan and to determine whether or not it should be approved.
The LVR is calculated by dividing the loan amount by the lesser of the value of your property or the purchase price (for purchases only) and then multiplying by 100.
For example a loan of $500,000 on a property worth $1,000,000 would have a 50% LVR. A loan of $1,000,000 secured by three properties worth $500,000 each would have an LVR of 66.67% (1,000,000 divided by 1,500,000 x 100 = 66.67%).
The majority of lenders consider 60% LVR to be safe with Low Doc Loans. Between 60% LVR and 80% LVR the lender may require that your loan be insured by a Lenders Mortgage Insurer (LMI). Over 80% LVR is considered to be a high risk and the choice of lenders may be limited.
How much can you borrow with a low doc loan?
The maximum any lender will approve on a low doc loan is 90% LVR (90% of the property value).
This is a more expensive loan, often referred to as a high lend loan. The cheapest Low Doc Lenders will not lend more than 80% LVR.
Typically if you are borrowing up to 60% LVR you have no maximum loan amount! In fact you can borrow $2,000,000, $10,000,000 or even more, all with no income evidence!
If you are borrowing 80% LVR then most Bank Low Doc Lenders will restrict your loan to $1,000,000.
With No Doc Loans most lenders will restrict your loan to a maximum of 75% LVR or $1,000,000, whichever is the lesser.
Do only non-bank lenders offer low doc loans?
Low Docs have become accepted by most major lenders including the six largest banks: the Commonwealth Bank of Australia (CBA), Westpac (WBC), ANZ, National Australia Bank (NAB), St George and Suncorp Bank. There are large variations between their lending policy and pricing.
Why should I use a mortgage broker for a low doc?
Because of the large variation between lenders it is essential that you talk to an expert to find the best deal for you. In fact, with Low Doc loans there are now basic loan and professional package discounts available from some lenders, just like with Full Doc loans!
There are also major differences between lenders in their LMI premiums, application fees and valuation fees that they will waive. This information is not published by lenders, but it is known by mortgage brokers!
Our services are free for standard residential loans! So you get to choose from the major banks and other low doc lenders without paying any more for having the help of an expert!
How can I switch from a low doc loan to a full doc loan?
Some lenders will allow you to switch to a full doc loan for a small fee after two years of perfect conduct (on time repayments).
Some lenders will require full income verification such as tax returns when you want to switch to a full doc loan or if you try to switch when you do not have two years of good conduct. With other lenders there is no need to switch because low doc and full doc loans have the same interest rate.
If in doubt just call us on 1300 889 743 or enquire online and we can help answer your questions.
How do I apply for a low doc loan?
We are specialists in Low Doc Finance and can help you find the right lender.
Just go to our Apply for a Low Doc Loan section and send us your details. We’ll be in touch with a few competitive quotes and will answer all of your questions.
Alternatively you can call us on 1300 889 743 and speak to one of our mortgage brokers right away!
Do you need an ABN?
Does the ABN need to be GST registered?
Australian Taxation rules require that if your turnover is above a particular threshold then your ABN must be registered for GST.
This is important to a lender because if you declare an income of $200,000 and this is above the threshold for GST registration then the lender would ask how you can earn $200,000 without being registered for GST. This would result in the loan being declined.
Currently, if your turnover is greater than $75,000 then you are required by the ATO to be registered for GST.
How long does the ABN need to be registered?
The majority of lenders require that your ABN be registered for at least two years. Some lenders have a shorter ABN registration period requirement such as one year or even one day!
For a No Doc loan you will typically require an ABN to be registered for one day or will not need an ABN at all.
Does it matter what type of ABN I have?
All types of ABNs are acceptable to most lenders. Sole traders, partnerships, companies and trusts are fine. It can get difficult if you are a shareholder but not a director of a company because it is more difficult for lenders to identify that you are associated with that company.
The same is true if you are the beneficiary of a trust but not the trustee or director of the trustee company. These situations are assessed on their merits by lenders.
What are the common reasons low doc loans get declined?
The common reasons why low doc loans get declined are:
- The income stated is not enough to service the loan.
- The location of the security property.
- Failing the lender’s credit score.
- A poor credit history.
- The type of property is not suitable for a low doc loan.
We have explained these in detail below.
Do lenders care if I can service the debt?
Yes! Although lenders do not require full evidence of your income they will still decline your loan if the income you have declared on your income declaration form is not enough to enable them to prove you can repay your loan.
It is a common misconception that because the lender has a property as security that they do not care if you can afford the loan.
Repayment of the loan by selling a property is considered by lenders to be an absolute last resort due to the social damage, risk of them losing money and damage to their brand caused by a mortgagee sale.
Are low doc Loans only for standard residential properties?
The majority of lenders will only lend to standard residential land, houses, townhouses or units in good condition. Normally this means units over 50m2 in size and houses on a block that is no more than 2 hectares in size.
However, there are lenders that can consider large blocks of land up to 50 hectares, serviced apartments, inner city apartments, multiple units on one title, construction loans and many more types of property as security for a low doc loan.
There even a few lenders who use commercial properties as security for their low doc loans.
Are there any location restrictions for Low Doc Loans?
Yes, the vast majority of lenders are very reluctant to lend to areas that are not prime regional or metropolitan locations.
As a rule of thumb if there are less than 10,000 people in a town then lenders may have restrictions on Low Doc loans in that area.
If the area in which your property is located is on an island not connected to the mainland, is in a small rural town or is a hobby farm in an isolated location you are likely to have significant difficulties obtaining a low doc loan from most lenders.
Many lenders assess location by the postcode which has given rise to the term postcode restrictions.
One of our lenders has no location restrictions for standard low doc loans, we recommend that you to call us on 1300 889 743 or enquire online if you believe location restrictions will be applicable for your loan.
What is my credit score and what does it matter for a low doc loan?
Some lenders rely on a credit score when assessing applications, while others have an experienced credit manager assess each loan on its merits.
When a loan is submitted to a lender that uses a credit score, the details are typed into a computer system which can then automatically assess the risk of several parts of information and give the application a score which indicates a statistical chance that the loan will go into default.
The sheer size and experience of some lenders allows them to have enough data to make this statistical chance of default accurate enough to use to assess loans. As such, they simply decline any loans that do not meet the credit score requirement!
Lenders do not publish what makes up their low doc credit score equations, however we expect that they assess your occupation, time at your current address, time in your business as well as details taken from your credit file with Veda Advantage.
As low doc loans have a past history of higher arrears, lenders are much stricter on credit scoring for all new low doc submissions.
If your credit score is the reason why your lender has declined your loan then call us on 1300 889 743 or enquire online and we can help submit your loan to a lender that does not use a credit scoring method of assessing loans.
Does my credit history matter?
Yes, your credit history can affect your loan application. Contrary to popular belief, low doc loans are usually strictly assessed and any adverse credit listings such as defaults or bankruptcy will result in your loan being declined by the major lenders.
Also if you have missed payments on your loan that is being refinanced then you may be declined.
Luckily there are non bank lenders known as non conforming lenders that have a “rate for risk” approach. This allows them to approve low doc loans for people with bad credit in return for a higher interest rate, a risk fee or both.
There are large variations in the way that these loans are assessed. We recommend that you to call us on 1300 889 743 or enquire online to find out which lender is most suitable for you.
Will my lender need to see statements for all my debts?
Most lenders need to see at least one statement for all your debts when assessing a low doc loan.
When refinancing, all lenders need to see at least three and usually six months worth of statements for the mortgage being refinanced and at least one statement for any debts being consolidated.
Some lenders do not need to see any statements for a purchase. For a refinance only loan, lenders will only need to see the statements for your home loan being refinanced.
We can help you find a lender that will keep the paperwork to a minimum, call us on 1300 889 743 or enquire online for the details.
What is an income declaration?
An income declaration is a form provided to the lender as proof of your income instead of the normal documents that they would need.
What is on an income declaration?
Typically an income declaration will require you to fill in your name, ABN, loan amount, repayments and to state your income. Some lenders will also require you to confirm your assets and liabilities or net asset position.
In all cases you will have to sign on the page confirming that you believe you can afford to repay the loan.
Why do I need to provide some form of income evidence?
Prior to 2010 it was possible to apply for a low doc loan without providing any evidence of your income. As long as you had an ABN you could get approved.
However when the NCCP act took effect it became a requirement for lenders and mortgage brokers to take reasonable steps to verify your financial situation.
In other words it became illegal to approve a loan if your income was not verified.
The legislation is open to interpretation and lenders decided that low doc loans can meet ASIC‘s requirements if some supporting documents were obtained to support the income that you have declared.
Most lenders will verify your income using one of the below:
What would I need to show to get a full doc loan instead?
For most self employed borrowers you would need to provide two years tax returns and notices of assessment for yourself and any companies that you are a director or shareholder of.
Most PAYG borrowers would need to provide two recent payslips or an employment letter backed up by their latest group certificate.
Other income such as rental income can usually be verified from your tax returns, a rental statement or a letter from the managing agent.
Do I need to prove my rental income?
Yes, the majority lenders require you to verify your rental income with rental statements, even with a low doc loan.
Will the lender ring my accountant to verify my declared income?
Most lenders do not call your accountant to verify the income you have declared. They may call your accountant to confirm that you are in business or are still trading or if there are any inconsistencies with the income you declared.
If your lender required an accountant’s letter to verify your income then they are very likely to call your accountant to confirm the letter.
Some lenders will require additional information from your accountant such as a letter confirming the trading status of your businesses.
Do lenders need an accountant’s letter to verify my income?
Each lender has their own method of verifying your income. The three main methods are an accountant’s letter, BAS or business bank account statements.
The majority of lenders do not accept accountant’s declarations, most prefer to use your BAS.
Can I just declare whatever income I need to get the loan I want?
No! Although most lenders would not question your stated income and would approve your loan, you are doing more harm than good if you lie about your income.
If a lender will not approve your loan because they believe you can’t afford it then usually it is not a good idea to borrow more money. We recommend you seek financial advice or complete your own budget to find out how much you can afford before committing to a new debt.
Can I sign a new income declaration with a higher income so the lender will approve a larger loan?
No, you only get one shot at getting approved. If you declare an income of $50,000 and the lender declines your loan because you can’t afford it then you cannot turn around and sign a new income declaration for $100,000 and just reapply.
It would be very bad practice for a lender to just approve loans without considering the possible harm they could be putting you in by allowing you to lie about your income. Other lenders may be able to consider your loan if they have not received an income declaration from you already.
As a general rule you must wait one to two years or have a good reason backed up by an accountants letter as to why you are declaring a higher income than the last application you have submitted.
You can consider applying with another lender in some situations, e.g. where you made a mistake on the original low doc declaration.
Do I have to pay an application fee or valuation fee?
This will vary between the lenders. With modern professional package low doc loans, fees such as valuation fees and application fees can be waived! With many major lenders the fees will be waived or the fee will be payable when the loan is advanced, not when the loan is applied for.
Other lenders such as non conforming low doc lenders tend to charge the cost of the valuation up front. If the set up cost of the loan is important to you then call us on 1300 889 743 or enquire online to find out which lenders will charge less fees up front.
We also have access to some lenders which allow us to order the valuation before we even apply for a loan. This is great if you are refinancing your property and need the highest valuation possible.
Will my lender charge a higher interest rate?
Some lenders charge a premium on their interest rate for low doc loans or will not give as large a professional package rate discount. We have lenders on our panel which have the same professional package rate discounts for both full doc and low doc loans!
Which low doc loan has the best interest rate?
Lenders are always issuing special offers and have discounts that are not published on their websites. Call us on 1300 889 743 or enquire online and we can advise you as to which loan is most suitable for your situation.
Believe it or not the lender with the cheapest interest rate is not always the best lender for you. Often a lender will give a rate discount but then charge a higher fee to compensate. So it is important to take a holistic approach when assessing the loan.
Our approach is to present you with several competitive options and allow you to choose which one you would prefer.
Are exit fees higher with low doc loans?
Exit fees were banned by the Australian government in 2010 for all NCCP regulated loans. In other words few low doc loans will have an exit fee at all.
There are some fees such as a discharge fee for processing the removal of the mortgage on your property. However this is usually quite small.
If you have a fixed rate low doc loan then you may pay a break fee if you repay the loan during the fixed rate period.
What is LMI?
LMI stands for Lenders Mortgage Insurance. This is insurance for the lender, allowing them to recover their losses should you default on your loan.
LMI does not protect you as a borrower or guarantor. A lender will not approve your loan if your application is too risky, so you don’t have a choice but to take out LMI if your lender requires it.
In most cases you do not choose the insurer as lenders have specific deals with one or two insurers. The lender will arrange the cover as part of their loan approval process.
In some cases, lenders have the power to approve the loan on behalf of the LMI provider which is known as a Delegated Underwriting Authority, or DUA for short.
As a general rule you will have to pay the LMI premium for the lender, although there are some lenders that will pay the premium for you in return for a higher interest rate.
Some lenders will always insure your loan, in which case they may pay for the LMI premium if your loan is below 60% LVR (60% of the value of your property).
The main insurers that provide Lenders Mortgage Insurance are Genworth Financial and QBE LMI. Some banks have their own LMI and others charge a risk fee and take on the risk of your loan themselves.
Will I have to pay LMI?
Although there is variation between lenders, the general rule is that you will have to pay the LMI premium if you borrow over 60% LVR (60% of the property value). Some lenders will still insure the loan below 60% LVR but will not charge you the premium, while others will not insure the loan at all due to the low risk of a 60% LVR loan.
If you are borrowing between 60% and 80% LVR then you will usually have to pay the LMI premium. Some lenders will pay the LMI for you in return for a higher interest rate.
How much will my LMI premium be?
LMI works on a sliding scale depending on the loan amount and the LVR (percentage of the property value that you are borrowing).
It may also vary because state governments charge stamp duty on insurance premiums, the amount of which varies between different states.
Some lenders’ LMI providers have different LMI premiums depending if your loan is regulated or unregulated by the Uniform Consumer Credit Code (UCCC).
A loan is usually unregulated if it is for business purposes or if a company is the borrower. Generally unregulated loans have higher LMI premiums than regulated loans.
Approximate LMI premiums (as a guide only!):
- $300,000 loan at 80% LVR approximately 0.55% or $1,650.
- $500,000 loan at 80% LVR approximately 0.79% or $3,950.
- $750,000 loan at 80% LVR approximately 0.80% or $6,000.
- $1,000,000 loan at 80% LVR approximately 0.98% or $9,800.
For any loan amount at 60% LVR or below there would usually be no LMI premium at all. For loans between 60% and 80% there are usually two different rates used, one for 60.01% to 70.00% LVR and another for 70.01% to 80.00% LVR.
Call us on 1300 889 743 or enquire online to find out which lenders have the cheapest LMI premiums! Alternatively, use our online LMI premium calculator to find an exact premium for your situation. A small difference in the rate charged for the premiums can mean a few thousand dollars kept in your pocket!
Which low doc lender has the lowest LMI premiums?
Because LMI premiums vary depending on the loan amount, LVR (amount you are borrowing as a percentage of the property value) and purpose of the loan there is no “best lender” for LMI premiums. The lender that is best for owner occupied loans under $300,000 may be terrible for loans of $1,000,000!
We usually ask you to provide your full details. We then calculate each lender’s LMI premium, fees and interest rates before returning to you with several options. Alternatively, use our online LMI premium calculator to find an exact premium for your situation.
As lenders do not normally publish their LMI premium rate cards it is essential to call us on 1300 889 743 or enquire online, your mortgage broker to find out which lender to use for your loan.
Do lenders have different assessment guidelines for low doc loans with LMI?
Yes, lenders have separate guidelines to that of the LMI insurers. If your loan is over 60% LVR and requires insurance then the loan may be approved by your lender but declined by the lenders mortgage insurer! In some cases the LMI may approve the loan but the lender may decline it!
As a general rule, lenders have relaxed guidelines for loans below 60% LVR and stricter guidelines for loans over 60% LVR.
Some lenders have the power to approve loans on behalf of the LMI provider using a Delegated Underwriting Authority or DUA. In these cases, the lenders use their own guidelines and can approve loans that would otherwise be declined by the LMI.
If your loan was declined by your lender’s LMI provider then call us and we can find another lender for you who either has a DUA or has less restrictive LMI guidelines.
When do I have to pay my LMI premium?
You will pay the LMI premium from your loan funds at the settlement of your loan. Settlement is when your loan is advanced or when the property you are buying is transferred into your name.
You do not have to pay the LMI premium every year. It is just one fee that is paid when the loan is set up.
Can the lender lend me my LMI premium as well?
Some lenders will be able to capitalise your Low Doc LMI premium on top of the amount you are borrowing. This would mean if your loan is $300,000 and your LMI premium is $1,650 then your total loan amount would be $301,650. Some lenders such as Westpac do not capitalise LMI premiums.