Think of all the payslips, bank statements and employment documents that a lender asks for and then goes over with a fine-tooth comb when processing a home loan application – what if you don’t have any of that information, your income is irregular, or you have a non-conventional occupation?
This is the reality for many small business owners, contractors, gig economy workers and self-employed individuals around Australia, making it more difficult for many of them to be approved for a typical home loan.
However, a low doc home loan could be the answer to your home loan problems.
A low documentation home loan (‘low doc’ home loan) is a type of home loan designed to be accessible to those without what’s considered ‘traditional’ proof of income (e.g. payslips, tax returns, letters of employment).
Whereas applying for a typical home loan would require a slew of documentation detailing your annual income, tax affairs and employment situation, low doc loans have slightly looser eligibility criteria that require less documentation, fewer financial statements and less formal evidence of your credit history.
This simplified (and less rigorous) application process makes low doc home loans a valuable option for self-employed borrowers, freelancers and contractors, but it’s not without its trade-offs.
Because of the perceived higher risk that comes with lending to non-conventional borrowers, low doc home loans typically sport higher interest rates and fees than those of standard home loans and may also come with stricter terms and conditions. Depending on the lender, you may be given a choice between a variable rate and a fixed rate home loan, or they may only offer one of the two on their low doc home loans.
If you’re interested, you may want to seek expert advice from a home loans specialists or financial advisor before committing to anything.
When applying for a low documentation loan, you’ll still need something to give the lender to prove your income, assets, liabilities and overall financial situation.
This means you’ll need to have at least some, but not necessarily all, the following information on hand:
The relevant lending criteria and amount of documentation required to be approved for a low doc home loan will vary by lender, so be sure to enquire to get a good idea of what documentation you might need to have handy.
The main trade-off low doc home loans make is between documentation requirements and the cost of the product. Low doc home loans are easier to be approved for than a traditional home loan, but to compensate, you’ll pay more in applicable fees and interest over the life of the loan than you would on a conventional home loan.
Additionally, whereas you may be able to secure a traditional home loan with a deposit smaller than 20% of the loan amount, you may be required to have 20% of the loan or more saved as a deposit to qualify for a low doc home loan.
You may want to consider these trade-offs at length and assess them against your current financial situation and priorities to help determine whether a low doc home loan might be right for you.
You’ll generally need 20% of the property value saved as a deposit to qualify for a low doc home loan. While some more traditional home loan options need only a deposit as low as 5%, the heightened risk associated with low doc home loans means lenders require a larger deposit to offset some of the risk they’re taking on.
On the plus side, this means your loan-to-value ratio (LVR) will be 80% or lower and you’ll likely avoid paying lenders mortgage insurance (LMI) as a result.
In Australia, the terms ‘alt doc’ and ‘low doc’ are generally used interchangeably when it comes to home loans. Some lenders may offer a distinctive home loan product that they label an alt doc home loan, but the two terms usually refer to the same type of loan – that is, a home loan that requires little documentation.
Yes, you may be able to initially take out a low doc home loan and then refinance to a full doc loan later on, either with the same lender or a new one. After a year or two of making consistent, on-time home loan repayments, you will likely have proved to your lender that you’re a trustworthy borrower, and as a result you may be more likely to receive approval for a standard, lower-rate home loan with a friendlier interest rate and lower fees, depending on the market at the time.
As low doc home loans tend to come with higher interest rates, it can be worth shopping around for more competitive, full doc loans after a couple of years to see if you can reduce your repayments. You can also speak to your lender about whether you might qualify for any of their full doc home loan products.
Low doc home loans are primarily aimed at prospective owner-occupiers, but some lenders offer low doc investment home loans. This will depend on the lender you’re working with and the range of low doc home loans they offer.
Despite their higher-risk, higher-interest nature, some low doc home loans may come with a range of optional features, including an offset account, redraw facility or the ability to make extra repayments.
However, this will vary by lender and by product, so be sure to ask before applying if you’re looking for a low doc home loan that comes with some or all of those features.
If you’re self-employed or a contractor and a conventional home loan isn’t an option for you, a low doc home loan could be your ticket to owning a home.
While we don’t compare low doc home loans right now, it’s worth noting that you can compare low doc home loans yourself using their comparison rates just like you can with conventional home loans.
Alternatively, if you’re in the market for a conventional (i.e. full doc) home loan, we can help you compare your options with our home loan comparison service. It’s free to use and takes seconds to get started; plus, if you want, we can put you in touch with one of our home loans specialists to help you take the next step in your home loan journey!
1 Australian Securities & Investments Commission. Review of ‘low doc’ home lending following the introduction of the responsible lending obligations. Accessed January 2023.
