A Low Doc loan, sometimes referred to as a Lo Doc Loan or a LoDoc Loan,
literally means "low documentation home loan".
Traditionally, self-employed borrowers had difficulty obtaining a home loan, as
they didn’t always have the required supporting documentation available. This
can be due to a number of reasons. Often Tax Returns are not up to date. Even up
to date returns can reflect your situation over 18 months ago. Your trading
figures may also include one off expenses or other circumstances that don’t
reflect your true ability to repay a home loan.
History
Banks traditionally required proof of your ability to repay a loan before they
would give you a loan. There are many people, particularly self-employed
borrowers, who are unable to provide the banks with documentation required to
get a traditional loan.
People looking for a loan that didn’t conform to the lenders normal criteria
would often get what was known as a solicitor’s loan. Solicitors were able to
arrange loans from wealthy individuals or organizations that were willing to
lend money to more “risky” borrowers.
In later years, similar loans became available via non-bank lenders who saw a
market in being able to lend to self-employed borrowers. These loans were known
as Low Doc, or Low Documentation loans as borrowers didn’t have to provide the
lender with traditional forms of documentation to prove their income.
These days,
Low Doc loans are available from many bank and non-bank lenders.
Interest Rates
When Low Doc loans were first invented interest rates were considerably higher
than standard bank interest rates. The higher rate reflected higher perceived
risk that lenders were taking in funding these loans.
After these loans had been on the market for a few years, it became clear that
Low Doc loans didn’t present a great risk to lenders. Mortgage Insurance
companies then started offering insurance policies against Low Doc loans. This
lowered the risk to the lenders, which in turn, allowed them to lower the
interest rates on Low Doc loans.
These days many lenders offer Low Doc loans at the same rates as their full doc
loans.
Loans up to 80% of the value of your property
Most lenders offer low doc loans up to 80% of the value of your property. These
loans are generally at similar rates to full doc loans. Most lenders charge a
mortgage insurance premium on loans above 60% LVR (loan to valuation ratio)
90% To 95% of the value
There are a number of lenders offering Low Doc loans up to 90% or 95% of the
value of the property. These loans are usually available at a higher interest
rate to reflect the higher risk to the lender.
Declaration
Low Doc loans usually require the borrower to sign a Loc Doc declaration stating
their income. The lender relies on this declaration rather than looking at Tax
Returns and pay slips. The declaration is similar to a Statutory Declaration. If
you are looking for a loan where you are not required to declare any income you
might want to consider a No Doc loan [link to No Doc page]
Australian Tax Office (ATO)
There is some concern with Low Doc borrowers that the Australian Taxation Office
(ATO) will target Low Doc borrowers for tax evasion.
Remember that it is not the responsibility of the banks to make sure you are
paying enough tax. All the lenders are trying to establish is that you have
enough income to meet your obligation under the loan contract. The ATO have
looked at Low Doc loans in the past. They found that many borrowers claimed a
different amount of income on their Low Doc application to what they declared to
the ATO. They also found that many Low Doc bowers had not submitted tax returns
for a number of years.
It is ultimately the responsibility of the borrower to be able to justify the
declared income if they were ever audited by the ATO.
If you are looking for a loan where you are not required to declare any income,
you might want to consider a No Doc loan. |
