Conversations with a Pug – Low doc home loans – a guide for the self employed

Low doc loans are designed for people who have the income to afford a home loan but not the standard documents to prove it. They are available from the big banks here in Australia as well as smaller players like non-bank lenders, credit unions and building societies.

Scenario: Jessica lives in Perth and earns $50,000 a year as a freelance graphic designer. While our home loan borrowing calculator shows Jessica could afford to repay a home loan of $300,000 because she doesn’t have some of the documentation necessary to apply for a standard home loan – letter from employer, group certificate or superannuation fund statement – she will need to apply for a low doc home loan. While Jessica will still need to fill out a formal application and provide some documentation of her income, assets and liabilities, she won’t have to provide the same level of documentation needed with a traditional full doc home loan.

What documentation will I need to apply for a low doc loan?

The specifics will vary between lenders but some of the standard documentation you’ll need includes:

• A borrower’s income declaration. This is a document where you verify the amount you earn and that you can afford the repayments.
• Registered business name.
• ABN.
• Business activity statements (BAS). Generally lenders will want to see 12 months work of statements.
• Personal and business bank statements.

Do lenders have eligibility conditions for low doc loans?

Yes, every lender will require you to meet set conditions to be eligible for a low doc loan. Unfortunately there is not a standard set of conditions for every lender but most major banks will require the following:

• Proof that you have been working in the same industry for at least one year.
• 12 months worth of consecutive BAS statements, verified by the Australian Tax Office (ATO) or an accountant’s declaration.
• Most recent personal and business bank statements – up to 6 months worth.
• Confirmation your income has been registered for GTS for a minimum of 12 months.

How do I compare low doc loans?

Some lenders will have standalone low doc home loans that are only available for people who are self employed or meet the criteria for a low doc loan. Other lenders will have a low doc option on their standard home loan offers.

The Big 4 banks (ANZ, NAB, Commonwealth and Westpac) all offer standard fixed and variable rate home loans with options for low doc borrowers.

Are there any differences between low doc loans and standard home loans?

Apart from the requirements of less documentation, with a low doc home loan you may pay a higher interest rate than someone on the same loan with full documentation. Be sure that you check the comparison rate, not just the headline rate, as this rate includes all the main fees and will give you a truer indication of the cost of the loan.

Another key difference between low and full doc loans is LVR (loan to value) requirements. With low doc loans the maximum loan to value ratio is 80% and anything over 60% LVR will require lenders mortgage insurance. On a standard home loan only loans with an LVR of 80% or more are required to pay lenders mortgage insurance. Lenders mortgage insurance is payable by you and protects the lender if you default on your home loan.

Scenario: Jessica wants to borrow $240,000 to purchase a property with a total cost of $300,000. Since she has a deposit of $60,000, this will mean she has an LVR of 80%. While she will be approved for the low doc home loan, she will have to pay lenders mortgage insurance as her LVR is over 60%.

The final key difference between low doc and standard home loans is the maximum loan size. With a low doc home loan you may find that the maximum loan amount you can borrow is lower than on a standard home loan.

What features should I look for in a low doc home loan?

The features you should look are the ones that are going to save you money. A home loan is a long term commitment so anything you can do to reduce the amount of interest or the time it takes you to repay your home loan will be beneficial to you whether you are self employed or not.

Here’s the top features to consider:

Mortgage offset account. An offset account saves you money by offsetting the money in your bank account with the interest owing on your home loan.

Scenario: When Jessica is approved for the $260,000 home loan, she decides to put $10,000 in an offset account. This means she will only pay interest on $250,000 and over the life of her home loan this will save Jessica big bucks in interest.

Additional repayments. Either lump sum or regular extra repayments will help reduce the amount of interest you’ll pay in the long run.

Scenario: Five years after taking out the home loan, Jessica’s freelance business begins to take off and she can now afford to make an extra repayment of $500 on her home loan. Over a 25 year term home loan with a 5% interest rate, our extra repayments calculator shows she would save $53,460 in interest and pay off the loan 4 years and 7 months earlier.

Splitting your home loan. Some lenders will have the option to split your home loan repayments between fixed and variable interest rate. This enables you to protect a portion of your home loan repayments if rates rise.

Free redraw. Sure, being able to make extra repayments is great when you’ve got the extra cash but if you need money fast, having the ability to redraw those funds can be a better way to pay for things than with a high interest credit card.

Scenario: 10 years down the track Jessica decides that she is ready to give her home a refresh and update the kitchen and bathroom. So instead of using a credit card or taking out a personal loan, she uses her home loan’s redraw facility to dip into the extra repayments she’s made to fund the reno.

Flexible repayments. Many home loans come with the option of weekly, fortnightly or monthly repayments, so you can time your repayments so that they work best for your income stream.

Scenario: Jessica gets paid by one of her big graphic design clients on a fortnightly basis, so she decides that the fortnightly repayment schedule is best for her, as it means she can set up her repayments to coincide with payday.

Compare low doc home loans

Every lender will have different eligibility criteria for low doc loans so rather than list loan features in a table, so reach out and let’s talk.

Source: Mozo