New technologies make it easier for Australians to work as sole traders or run their own businesses. And millions do so – driven by their passions, lifestyle goals, or simply necessity.
There are estimated to be over two million small and medium-sized businesses in Australia helping to power the nation’s economy. Working for yourself provides freedom and flexibility, but it can mean a fluctuating and less secure income.
This can make it harder to secure a traditional home loan, which usually requires three years of tax returns to prove a steady income. Often self-employed people do not have this paperwork, particularly if they have recently started their businesses. Fortunately there are low doc home loan products available that cater to this growing market segment. Find out more:
- What does low doc mean?
- Who could benefit from a low doc loan?
- What types of low doc loans are there?
- What features are generally available on a low doc loan?
- What features are generally not available?
- How to get approval for a low doc loan?
- What to do next
What does low doc mean?
In Australia, a low doc loan means you don’t need to provide three years’ worth of financial statements or tax returns to be eligible for a mortgage.
Low doc loan products are designed for lenders who have a good deposit or income and the ability to service their debt, but do not necessarily have the paperwork to validate this.
Lenders will still need to be comfortable though that you can meet your repayments. They will generally still need you to provide evidence of income, but may have different documentation requirements. They may ask you for:
- your business activity statement for the last 12 months,
- business bank statements,
- interim financial statements,
- tax returns for last two years,
- a letter from your accountant that verifies your income.
You will also need to provide some basic information about your business, such as its name, ABN and GST details.
Generally you will pay a higher interest rate or higher fees and charges for a low doc loan product as they carry more risk to the lender. However a low doc loan could enable you to buy the property of your choice at a time that suits you.
Furthermore, many choose to refinance their mortgage – and potentially access lower interest rates, lower fees, and better product features – when they have the necessary paperwork to qualify for a full-doc loan.
Who could benefit from a low doc loan?
Typically those who are self-employed or who cannot easily prove their income opt for low doc home loans. Likewise those who have fluctuating incomes, or who have received lower income than usual during the last financial year could be well served by a low doc loan.
Like a full-doc loan, borrowers will still need a clean credit file and history of paying their debts on time. It helps also to have a substantial deposit – or equity in property – to avoid paying Lenders Mortgage Insurance (LMI).
Most lenders prefer a Loan to Value Ratio (LVR) of less than 60% given the increased risk of default that low doc loan products carry. If you need to borrow more than 40% of the value of the property, you will usually need to pay Lenders’ Mortgage Insurance. Generally your application is more likely to be approved if you are seeking to borrow less than $1 million.
What types of low doc loans are there?
There are different types of low doc loans, which come with different interest rates, fees and charges. For example:
- No Business Activity Statement (BAS) Low Doc Loans – If your income is under $75,000 and you are not registered for GST, then you cannot provide a Business Activity Statement. In this circumstance there are some lenders who will accept an accountant’s letter or business bank account statements as proof of earnings
- No Payslip Low Doc Loans – If you do not have pay slips you will need to find other ways to prove your earnings. This could be a letter from your employer, or providing your bank statement or tax returns.
- No income, no assets loan – This enables you to access a loan product even if you cannot prove your income. Your loan will, however, need to meet a number of criteria. Lenders will require you to sign a declaration stating that you can afford the loan; they will also want to know how you will repay the debt, such as through the sale of another property.
What features are generally available on a low doc loan?
There are a number of features – available on low doc loans – that can help you better manage your finances or pay your debt off sooner. These include:
- Additional payments – this allows you to make extra payments without incurring a cost. Some lenders will limit the number of additional repayments you can make or charge a fee for this. Making additional payments could be a useful if there are times when you earn more money than normal, and you want to use these funds to reduce the interest that you pay on your home loan.
- Redraw facilities – this allows you to redraw additional payments that you have made into your home loan. This may help you meet financial obligations for unexpected costs or when cash flow is tight.
- Interest-only repayments – this means that for an agreed period you only pay the interest on the amount borrowed; you do not make any payment towards the principal. This minimises your repayments in the short term, anticipating the property will grow in value over the long term.
- Offset accounts – this means you can use your excess funds to offset the principal of the loan. For example, if you have $400,000 outstanding on your loan balance and have $10,000 in savings, you would accrue interest on $390,000. This reduces the interest that you pay over time, meaning you can pay off your loan faster.
- Flexible rates – some providers allow you to choose between fixed and variable rates or split your loan to access different interest rate structures. Fixed interest rates tend to be higher, but can offer peace of mind that you can afford your repayments through the life of the loan.
What product features are generally not available?
Low doc lenders do not normally accept or offer:
- third party guarantees (a loan that is guaranteed by someone else in the event that the borrower defaults)
- repayment breaks – a feature that allows you to take a break from repayments for an agreed perio
- introductory interest rates – a lower initial interest rate of between one and three years before reverting to a standard interest rate.
How to get approval for a low doc loan
Here are some things to bear in mind when making your application:
- Do not overstate your income. Lenders will be wary of you if your income does not seem plausible for your age and occupation.
- Provide a clean credit history – make sure that you have made debt repayments for at least six months so defaults are no longer on your credit record. (If this isn’t possible, you may still be able to access a low doc loan through a specialist lender)
- Present your business in the best possible light with your business activity statement and business bank statements showing a high turnover.
- Demonstrate a good asset-to-income ratio – this means that you have more in assets (things that you own outright) than you earn, demonstrating good financial management. For example, if you earn $120,000 a year, lenders may want to see that you have around $240,000 in assets.
- Ensure your paperwork is in order and that you have ABN and, if relevant, GST registration.
- Work out how much you can afford to borrow.
What to do next
Engage a uno adviser to help you find an appropriate loan. We advise first-time buyers and seasoned property investors, making the application process as straightforward and hassle free as possible for everyone.
We can advise you on:
- which lenders offer low doc loans;
- what documentation they require;
- what interest rates, fees and features are available;
- how to make your application as strong as possible.
You can also check out our calculators to compare home loan products and get the best rates available.
With Alexi Neocleous
This information is general in nature and you should always seek professional advice when making financial decisions.