The requirements for low doc home loans in Australia have changed dramatically since the global financial crisis. Such types of loans typically offered more flexible income verification for self-employed borrowers or irregular incomes were once common but have come under more scrutiny in recent years.
(PRUnderground) April 17th, 2024
So the big question – are low doc home loans still available for Australian borrowers today? The short answer would be yes, but the landscape has shifted.
Low doc loans – also called low documentation or stated income – allow borrowers to get a mortgage with less paperwork to prove income. Whereas a traditional home loan application requires payslips, tax returns, and other documentation to prove income, low doc home loans rely more on the borrower declaring his earnings with confirmation by an Accountant or BAS Statements.
This made low doc loans attractive for self-employed people, small business owners, or individuals with irregular incomes who might have difficulty meeting the stringent documentation requirements of a standard mortgage. But the global financial crisis of 2008-2009 exposed weaknesses in the low doc lending model, fearing income inflation or outright fraud.
Key Takeaways
• Availability in the Modern Market: Low Doc Home Loans remain available in Australia but have increased restrictions and requirements.
• Increased Documentation Needs: There is a move towards more stringent documentation versus very loose standards pre-global financial crisis.
• Target Demographic: These loans remain geared toward self-employed people and those with irregular incomes.
• Implications for Costs: Usually, Low Doc Loans carry higher interest rates and larger deposits.
• How to Navigate New Regulations: Understanding how recent regulatory changes have impacted the qualification process.
In the wake of the storm, Australian regulators tightened oversight of low doc lending. The Australian Prudential Regulation Authority (APRA) released new guidelines for banks and lenders that call for them to conduct much more complete checks on borrowers’ income and repayment capabilities.
As a result, the low doc home loan market in Australia has contracted significantly. Many mainstream lenders have trimmed or dropped such products entirely, and are now focusing on full income verification. But the low doc loan segment has not disappeared altogether.
A few non-conforming or “specialist” lenders remain that offer low doc mortgages, but with heftier requirements than before-GFC. These lenders may still accept other forms of income documentation, including business activity statements (BAS), profit and loss statements, or letters from an accountant. But they will usually require a larger deposit (often 20% or more) and higher interest rates to cover the perceived risk.
So who might still qualify for a low doc home loan today in Australia? The target market is self-employed individuals, small business owners, and other irregular or fluctuating incomes which can not meet the stringent documentation requirements of traditional lenders.
Even these borrowers will need to show earnings record, good credit, and enough equity or deposit to qualify. Lenders will also scrutinize the nature of the applicant’s business, industry, and financial picture.
Additional Features of Low Doc Loans
Higher Interest Rates
• Typical Rates: Usually 1-2% above the standard variable rate.
• Impact on Borrowers: Among the trade-offs for getting a low doc home loan is that borrowers can expect to pay higher interest than on a conventional mortgage. This interest rate premium covers the higher risk lenders assume by offering financing with reduced income verification. Whereas a standard variable rate home loan in Australia would currently be around 5 >6%, a low doc loan will typically be between 6 > 8% and higher. This particular higher rate could significantly impact the monthly mortgage payments a borrower makes and the total price of the loan.
Larger Deposits
• Deposit Requirements: Some lenders require a minimum 15% deposit instead of 5 -10% required for a regular mortgage.
• Financial Implications for Borrowers: These higher interest rates mean low doc borrowers are typically required to have a larger deposit or equity contribution. Whereas a traditional home loan requires only 5-10% down, low doc lenders will typically require at least 15 > 20% down. This limits the risk they are taking by not verifying the borrower’s income as thoroughly. A bigger deposit also lowers the loan-to-value ratio, making the lender seem riskier. Some self-employed or irregular income borrowers find saving a 20% deposit plus stamp duty plus costs difficult.
Lower Maximum Loan Amounts
• Loan Caps: Low doc home loans may cap a maximum loan size of $2 million or less.
• Market Comparisons: As part of their more conservative stance, low doc lenders also tend to set lower maximum loan amounts than standard home loans. Whereas a traditional mortgage can top $5 million or more, low doc loans typically top $2 million or less. This lending limit reflects the lender’s assessment of the higher risk profile of low doc borrowers and helps keep the loan amount proportionate to the borrower’s overall financial picture, even with limited income verification.
Lenders Tightening Criteria on Overall Risk
• Areas of Increased Scrutiny: Including credit history, asset position, and loan-to-value ratios.
• Consequences for Approval: Beyond just the income verification process, low doc lenders have also significantly tightened their overall assessment of applicant risk. This includes more rigorous checks of the borrower’s credit history, their asset position and net worth, and the loan-to-value ratio. Lenders want to know that the borrower has a solid financial foundation and can make timely mortgage payments—without the typical income documentation. That has meant a higher bar for low doc loan approval, making it harder for some self-employed or irregular income borrowers to qualify.
Conclusion
So overall, low doc home loans are still around in the Australian market but are hardly the more permissive environment that existed before the global financial crisis. The bar is higher for borrowers wanting such loans, and they will pay a premium in the form of increased interest rates and bigger deposits.
Those who do make the low doc loan process work can still get some flexibility and convenience. But it is critical that potential borrowers weigh the advantages and disadvantages, and also talk to a seasoned mortgage professional prior to making a choice in regards to a alt doc home loan.
Call to Action
In case you’re a self-employed individual or have an irregular income and want to check out low doc home loan options in Australia, contact our experts at NonConformingLoans.com.au today. We can show you the low doc lending landscape, your eligibility, and the lender and loan product that fits your needs.
About Non Conforming Loans
Non Conforming Loans have Non Bank Lending Solutions for Borrowers that don’t fit traditional lending criteria. We are the experts in finding ways to assist with your loan approval.
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