Not everyone can get a regular home loan. For some, ‘low doc home loans’ are the best available option.
- What is a low doc home loan?
- Who are low doc home loans for?
- What documents do you need to apply for a low doc home loan?
- Who offers low doc home loans?
- How do low doc home loans compare?
In the land of the ‘fair go’, small businesses are often lauded for being one of the pillars of Australia’s economy. Yet small business owners don’t necessarily get a fair go when it comes to applying for a home loan.
Given self-employed workers don’t earn a set salary in the traditional sense, it can be more of a challenge for them to prove their ability to repay a mortgage.
Fortunately, there is a type of home loan specifically designed to cater to these workers: low doc home loans.
Low rate variable rate home loans
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 03 April 2020. View disclaimer.
What is a low doc home loan?
A low doc home loan is a low documentation home loan. It’s a home loan available to those that don’t have the correct proof of income documents available at the time or can’t get them at all.
Low doc home loans were first introduced by non-bank lenders through mortgage brokers in the late 1990s to provide an alternative to mainstream lending. These days, a fair few bigger and smaller lenders now offer low doc home loan products.
So what’s a no doc home loan?
Low doc home loans are not ‘no doc’ home loans. No doc home loans were home loans that required no documentation (proof of income, employment history etc.), but following the global financial crisis, they’re no longer offered by reputable lenders.
Who are low doc home loans for?
Low doc home loans are special lending products for those who might struggle to provide the standard proof of income documentation needed to apply for a home loan, such as:
- copies of most recent payslips
- pay summaries
- rental income statements
The first two dot points are highlighted since these are the typical docs that self-employed people may not have.
It’s because of this that low doc home loans are primarily targeted at self-employed workers (such as small business owners, freelancers or contractors) who have no payslip records since they often don’t get a payslip or group certificate.
What documents do you need to apply for a low doc home loan?
As the name suggests, you need less documentation than you would with a standard home loan, but you’ll still need some. Since they’re primarily geared towards business owners, you’ll likely need:
- A registered business name and ABN
- Business activity statements for at least 12 months
- Your bank statements (even if you don’t have a traditional income, they’ll still want to see the money in and money out of your account
- A letter from your accountant, if you have one
- Interim financial statements
Because of the National Consumer Credit Protection Act (NCCP) Act, lenders are required to have some kind of income verification from you before they approve your loan, so unless you can provide some proof of income, you won’t be approved.
Who offers low doc home loans?
Low doc home loans used to be more common, but in recent years some lenders have stopped offering them.
For example, the following bigger lenders have either stopped offering low doc home loan products or have tightened their restrictions on them:
- RAMS (April 2019)
- Adelaide Bank (February 2019)
- BOQ (July 2018)
- Commonwealth Bank (July 2018)
- Westpac (July 2017)
And these are just a select few. National Australia Bank hasn’t offered them for years. Of the big four banks, ANZ is really the only big bank that does still offer a low doc home loan product.
Since December 2010, the value of low doc residential home loans lent to households fell from $60.2 billion to $20 billion, with the number of loans falling from around 300,000 to 100,000, according to APRA statistics. They now make up about 0.3% of overall lending per month, so they’re not a hugely popular product.
Just know that when it comes to low doc home loans, lenders might restrict applications to:
- Properties in metropolitan locations
- Loans below $1 million
This is due to the riskier nature of low doc home loan applications. But as with all financial products, it varies from lender to lender – some providers may be willing to lend up to $2.5 million!
How do low doc home loans compare?
Generally speaking, low doc home loans don’t have interest rates that are as competitive as regular home loan rates. In most cases, they come with higher rates to compensate lenders for the higher perceived risks low-doc borrowers might pose.
At the time of writing (May 2019), one of the lowest home loan rates you can get is about 3.40%, which is extremely low. By contrast, one of the lowest low doc interest rates is 4.40%, a full 100 basis points higher. At the higher end of the scale, low doc home loan interest rates can be in excess of 9.00%. So it’s still important to shop around for a good rate since there are some good ones available. Just temper your expectations and be prepared to pay more than you would with a standard home loan.
The standard home loan fees usually apply to low doc home loans too – that’s upfront and ongoing fees as well as refinancing fees or break costs for fixed loans. These fees can also be higher than normal loans although this will depend on the lender.
Instead of charging lenders mortgage insurance, some low doc loan providers might charge a risk fee (also known as a low deposit premium) to account for the added risks associated with a low deposit loan.
A positive of low doc home loans is that they can still come with the usual home loan features:
- 100% offset accounts
- Line of credit options
- The ability to make extra & more frequent repayments
- Split and interest-only loan options
Low doc providers are less likely to accept borrowers with deposits smaller than 20%. In fact, some restrict their low doc home loans to a maximum LVR of 60%, which would require a deposit of at least 40%. This can also depend on how long you have been in business. Those who have been in business under the same ABN for over two years may be able to borrow more.
Frequently asked questions
1. Can I get a mortgage after one year self-employed?
If you've been self-employed for less than two years, you may still be able to get a home loan - but there's likely to be strings attached. Some lenders may require you to have worked in your industry for longer than two years if you've only been self-employed for one year.
2. How much can I borrow if I'm self-employed?
If you're self-employed, some lenders won't allow you to borrow any more than 60% of the value of the property. Those that do will likely charge Lenders Mortgage Insurance (LMI). However, this can all depend on how stable and reliable you can prove your income to be. Someone with a strong history of earning a reliable income running the same business for many years is likely to be able to borrow at a higher LVR than someone that's only been self-employed for a year.
3. Can I get a home equity loan without proof of income?
The policies of different lenders may vary, but you will generally need to provide proof of income.
4. Can you buy a house with no income?
If you aren't earning any income at all, then unless you're flush with cash you will probably find it extremely hard to buy a house because it'll be very difficult for you to be approved for a home loan. But you can buy a house on a low income as long as you can prove you can pay off the loan, have a good credit score, and look within your means. However, there are some lenders which may accept welfare payments or insurance payments as income.
5. Can you buy a house while unemployed?
The short answer is that it's very hard to secure a home loan to buy a home if you're unemployed. This is because without a regular (or any) income, you will struggle to make the regular repayments on your loan, unless you're receiving a large welfare cheque from the government or regular insurance payments (but even then, some lenders don't accept these as valid sources of income). As income is the biggest factor that determines whether or not you get a home loan, it would be nonsensical for a lender to give someone without an income a loan.
Savings.com.au’s two cents
Low doc home loans are a useful product for their target audience, but those who aren’t careful can get stuck paying higher interest rates for the life of their home loan, which is hardly ideal.
It’s possible to refinance from a low doc home loan to a full doc home loan (a standard home loan) after a few years, provided you:
- Have regularly met your repayments
- Have maintained a clean credit history
- Can provide your tax returns as proof of income
If your lender allows you to do this, then switching to a full doc home loan could be much cheaper in the long-run.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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