Low doc home loans

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, PAYG summaries, letters of employment).

Whereas applying for a typical home loan would require 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 mortgage broker or financial advisor before committing to anything.

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 some or all of those loan features.

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.

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:

• Tax returns
• Proof of an active ABN or registration of a business
• Business records (e.g. profit and loss statements or a notice of tax assessment)
• Business activity statements (BAS; or business bank statements)
• Bank statements
• An accountant’s letter, which is a signed declaration from an accountant regarding your annual net income.

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.

You’ll generally need at least 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.

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.

The main trade-off low doc home loans make is between documentation requirements and the cost of the product. Low doc home loans are usually 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.

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.