Low doc Loan
Deregulation of Australia’s financial system since the early 1980s has brought major changes to the mortgage market, and low doc loans are among the most significant. Low doc (short for ‘low documentation’) loans have made property ownership possible for many people who would otherwise have been denied the opportunity. These people include self-employed, seasonal employees who regularly change jobs, contract workers, investors, or people who earn commissions.
For many of these borrowers, their past income does not reflect their existing income or their capacity to service a home loan. A number of banks and other lenders are now providing low doc loans in response to demand from such borrowers. The major difference between this product and a standard home loan is that borrowers are not required to provide the same level of tax returns, financial statements, pay slips or other documentation to prove their savings/credit history, earnings and financial position.
Instead they sign a declaration stating their current income, and the lender uses this to process the application. But this does not mean low doc loans are always easier to get; they are in fact generally harder – and they often cost more. Lenders will usually charge a slightly higher interest rate than the standard variable, and the loan to value ratio (LVR) is generally restricted to below 80 per cent.
The LVR is defined as a percentage of the property’s value that is mortgaged – for example if you buy a home for $500,000 and have borrowed $400,000, then your LVR is 80 per cent. To ensure that the purchase price of the property is a true reflection of its actual value, lenders will usually require an independent valuation of the property the borrower proposes to purchase.
It’s also worth knowing that following the turbulence in financial markets since 2008, low doc loans are becoming more difficult to obtain now due to tightening credit standards of lenders.
Mortgageport will advise you of all the fees and charges associated with this type of loan, as they do vary greatly and are often significantly higher than for standard loans.
