Are Low Doc Home Loans Still Available in Australia?
by Rae E. Non Conforming LoansThe 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.
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 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 low doc home loan.
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Created on Apr 16th 2024 20:09. Viewed 61 times.