How Low- and No-Doc Loans Work in Australia
Updated: Mar 10
Australian Home Loans: What You Need to Know About Low- and No-Doc Options
Getting a much-needed financial boost can be tough especially if you don't have proof of income, property ownership, or employment to show. Yet there are home loans, called "low-doc" or "no-doc" loans, that won't need these documents when you apply for one. If you come to think of it, the so-called no-doc loan may sound like a fast and convenient way to get funding. Generally, these low-doc loans are not that common in Australia as these are usually offered as an option for self-employed borrowers who don't have traditional proof of income.
Regular home loans require full documentation of income, employment, and ability to repay. If you're without access to regular PAYG payslips, then getting a home loan can be challenging especially for fledgling freelancers and small business owners with very limited financial records.
The Home Loan Market Landscape in Australia
In the past, low- and no-doc loans were more popular and readily available in the Australian home loan market. However, the regulations for these types of loans have become stricter and their availability has become more limited in recent years. This is due to the increased risk for the lender and the potential for borrowers to default on their loans.
As only a few lenders offer these types of loans, borrowers will have to provide some form of income verification and may be required to have a higher credit score, or a higher deposit or equity. It's important to note that these loans may not be the best option for everyone. There are other types of loans available in the market that may suit your needs better.
Additionally, the Australian government provides a First Home Loan Deposit Scheme that allows eligible first home buyers to purchase a home with a deposit as low as 5% (with some conditions apply) and it could be a better option for some buyers.
The top low-doc loan options include: Reduce Home Loans' Capitalizer Alt Doc Variable, Resimac Prime, YellowBrickRoad Wealth Management's Essential Options Alt Doc, and Resi's Essential Options Alt Doc.
What are Low- and No-Doc Loans?
Many people often confuse low-doc loans with no-doc loans, which require minimal financial documents. The latter was phased out by most lenders following the global financial crisis and the introduction of the National Consumer Credit Protection Act of 2009 (NCCP Act) thereby tightening the lending criteria for home loans.
Although it's initially designed for self-employed and small business owners who may not have access to the financial and tax return requirements for a home loan, being self-employed does not mean you must have low or no-doc loans. If you're in short-term self-employment, you can opt for low-doc loans. Self-employment can be less of an issue if you're buying as a couple and one person has a permanent job. However, if you both own a business together, for example, that can make the loan application more complex.
With that being said, Australian financing companies have taken reasonable steps to verify every borrower according to their circumstances and declared income. Alternative income documentation may be required in the absence of tax returns. Depending on the lender, they have other requirements that the borrower should comply such as:
✔️ accountant-signed declaration of your income
✔️ Goods and Services Tax registration (GST)
✔️ Business Activity Statements (BAS)
✔️ bank statements of your business
✔️ old tax returns and interim financial statements
Many Australian and international banks have removed their low-doc products for all homeowner, investment loan, and line of credit applications or made them available only under strict criteria. While it's still possible to find non-bank lenders who allow such a loan for property purchases, it has become more difficult to find those willing to refinance an existing low-doc loan or an existing investment loan.
a. Who is Qualified to Get Low-Doc or No-Doc Loans?
These loans may be the better option in a variety of situations.
Self-employed individuals have a harder time providing proof of income and employment so getting a low or no-doc loan is the better option.
People with irregular income, such as commission-based jobs, may find such a loan an ideal option as it provides greater flexibility in terms of proof of income.
Homebuyers with credit issues may find it harder to get approved for a traditional home loan so a no-doc loan is the right choice.
Non-residents or foreign citizens may have a hard time providing all the documentation required for a traditional loan so opting for such a loan may be suited for them.
It's important to know that these situations are just examples and not an exhaustive list. Every individual's financial situation is unique and it's always advisable to seek professional advice before deciding on home loans.
b. How Much You Can Borrow?
There are limits on how much you can borrow in low and no-doc loans depending on the factors discussed earlier.
65-70% of the property value: Some larger second-tier lenders provide rates 2–3% higher than the banks.
Loan term: Up to three years of interest.
Residential properties: Acceptable as long as the loan is NCCP unregulated.
Commercial properties: Some lenders will allow you to borrow up to 65% of the property value.
Maximum loan size: In most cases, lenders will limit their exposure to $1 million per borrower.
c. Loan Approval
Getting your low or no-doc loan approved may depend on your credit and repayment history. Even if there are significantly more documentary requirements as compared with traditional loans, there are multiple factors that determine the lenders' decision about the success of your application. They tend to look at the big picture by looking favourably at your good credit rating and your reasonable asset-to-income ratio.
d. Interest Rates
If there is one caveat you need to know, getting this loan would mean paying a higher interest rate as lenders see you at a higher risk of being unable to pay your mortgage back. That means, the higher percentage of your property value you're borrowing, the higher the interest rate will be.
There are exceptions though, the interest rates from individual lenders may be comparable to standard mortgage interest rates. These lenders assess their risk appetite based on certain factors like your deposit size, supporting documents provided, assets, and credit history.
Apart from interest rates, you may want to make a comparison of the fees and features. If unsure, talk to a financial expert for sound advice.
e. Things to Consider
The only way to know if getting a low and no-doc loan will suit your needs and requirements is to understand its strengths and weaknesses.
Designed specifically for borrowers who may not have the traditional documentation required for a home loan
Offers more privacy as it requires less documentation
Faster approval process
More lenient to homebuyers with credit issues
Higher interest rates
Strict lending criteria and harder to get approved
Aside from the essential information, we also have some tips and advice on how to find and apply for low and no-doc loans in Australia:
✔️ It's important to research different options to find lenders that do provide such loans. You can start by checking with banks, credit unions, and specialised lenders to self-employed or people with irregular income.
✔️ Be honest about your financial situation as lying or providing false information can result in a loan being denied or a higher interest rate.
✔️ Be sure to compare the interest rate, fees, and other costs associated with the loan.
✔️ Always check your credit score and credit report by making sure that you're in good standing.
✔️ It's important to have some basic documentation ready such as proof of identity, proof of residence, and proof of income.
✔️ Be realistic about your expectations. Keep in mind that these loans may have stricter lending criteria and may not be available for everyone.
✔️ Know for a fact that these loans come with higher interest rates and stricter lending criteria so be prepared to pay more in interest over the life of the loan.
✔️ Work with a mortgage broker as they can help you find the best loan options and guide you through the application process.
Low and no-doc loans can be a viable option for Australian homebuyers who may not have all the required documentation for a traditional home loan. However, it's important to understand the pros and cons of these loans and how to navigate the market to find the best deal.
As always, it's crucial to make an informed decision when financing a home. By keeping these things in mind, you can increase your chances of achieving your homeownership goals.
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