Low Doc Loans

In recent years, one of the fastest growing segments of the Australian mortgage market has been the ‘low doc’ home loans. These are loans for which borrowers are able to “self-certify” their income during the application process. Full financial documentation such as payslips or tax returns do not need to be provided by the borrower. Low doc home loans were introduced primarily for the self-employed or those with irregular income whose finances may not be up-to-date at the time of the loan application
The value of low-doc loan approvals in Australia has grown over the past year, even though these loans are estimated to only represent around 5% of the loan market.

Initially, low-doc loans were marketed only by specialist non-bank lenders, but in recent years mainstream lenders and even some of the major banks have also entered the market.

While some of the non-bank lenders are prepared to offer low-doc loans to borrowers with impaired credit histories or other “non-conforming” characteristics, mainstream lenders still expect the client to have a clean credit history and a sizable deposit. The good news is that the deposit required with a Low Doc loan can now be as low as 5% and the interest rate which was previously loaded for the extra risk is these days not much different to the standard variable rate.

Lenders have also increased the maximum size of low-doc loans that they are willing to provide. When low-doc home loans were first introduced, the maximum allowable loan size was generally around $500 000 but these limits have since been increased, contributing to an increase in average actual loan sizes. Recent estimates based on securitised loans suggest that new low-doc loans are on average around 30 per cent larger than conventional loans.

Analysts estimate the low-doc loan market in Australia is growing at more than 15 per cent a year compared to 12 per cent for traditional home loans.
In recent times, the Tax Office has expressed concerns at the growing numbers of persons applying for loans which allow them to declare an income beyond that declared in their tax returns. The Tax Office is threatening to target users of the low doc loan products in their future tax audits. To facilitate this the Tax Office is considering forcing lenders to provide confidential customer information enabling it to match tax returns against mortgage insurance records.

Macquarie Research estimates the low-doc lending market is worth up to $50 billion, or 8 to 12 per cent of the mortgage market.

According to reports by Australia’a leading home insurers, defaults on low-doc loans are escalating but at this stage do not present a serious concern. A contributing factor has undoubtedly been the recent upward trend for interest rates.

No-doc Loans

No Doc Home loans are similar to Low Doc Home loans with the only difference being that no information needs to be provided by the borrower on his income or asset levels. The lender is effectively providing the borrower with a mortgage which is solely secured by the property being purchased. These loans are generally provided at a lower LVR than the Low Doc loans and an even higher interest rate - they are seen to present a greater risk to the lender than the low-doc loans.

Applicants who own businesses, make commissions, live off investments, get their income in cash - may not want to give up their privacy and are often prepared to pay for this privilege. No Documentation mortgages were designed for such applicants.

Borrowers pay for the flexibility and privacy of these types of mortgages. A clean credit is a must. Lenders also want the No Doc borrowers to make a larger deposit (generally 30% to 40%).

Some of the key reasons why an applicant would consider a low-doc/no-doc mortgage include:
Self Employed applicants whose financials are not up-to-date;
Financially independent people with complex asset and income structures;
Retirees who live off investments;
People whose lives are in a flux because of divorce, recent death of a spouse, or career change.

Both the Low Doc and the No Doc markets are fairly new to Australia. These loan products have made it possible for people who can afford a loan but do not qualify with a traditional lender to borrow. They have also made it possible for people who are asset rich but cash poor to get access to the equity in their property without needing to sell any assets. The No Doc Loans in particular, serve as an excellent wealth generation tool as borrowers are able to use the equity in their existing assets as a deposit in the acquisition of future assets and thus over time grow a property portfolio.

If you would like to read more about the Low Doc and No Doc Home Loan products available in Australia, please visit :

www.webdeal.com.au
or www.honeyloans.com.au.

Maya Pavlovski holds a Bachelor of Commerce degree from the University of Melbourne and is a qualified CPA.

Tags: Low Doc Home Loan, Low Doc Loans, Low Doc Mortgage, No Doc Home Loan, No Doc Loans, No Doc MortgageLow Doc Home Loan, Low Doc Loans, Low Doc Mortgage, No Doc Home Loan, No Doc Loans, No Doc Mortgage

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If you are a new to the lending game and have never taken out a home loan before - here are some issues that you should consider before choosing your loan.

1. Check your credit rating

Before approaching a lender for a home loan make sure that you have a clear understanding of what is on your credit report. There’s nothing worse than being refused a loan because of a small debt that you fixed up years ago, or an error which was not your fault or responsibility.

Get a copy of your credit history on www.mycreditfile.com.au. If you do find something, take immediate action. If the report contains any mistakes these have to be removed by writing to the credit provider.
In the event that your credit history is very unhealthy you may need to approach a lender who specialises in Bad Credit Home Loans. Traditional lenders such as the major banks will generally not consider such loans. Applicants with a history of bad credit also must have a deposit. While some lenders do offer No Deposit Home loans - these are only available to applicants with a clean credit history.

2. Know your entitlements

If you qualify, you will receive the federal government’s $7000 First Home Owner’s Grant (FHOG). To find out if you are eligible check www.firsthome.gov.au. There are also state bonuses which you can find out about by checking with your office of state revenue.

3. 100-point check

If you’re approaching a lender for the first time ie. you have no existing relationship with them you’ll need to be “identified”. When you apply for a home loan you have to show identification up to the value of 100 points. A driver’s licence earns 40 points, a credit card can earn 25 points and a birth certificate 70 points.

4. What Type of Home Loan should you consider?

What sort of a borrower are you? Should you look at a Low Doc or a No Doc Loan? Are you a Non-conforming borrower? This will depend on the following. Your

- employment status;

- income position;

- available deposit;

- residency;

- age;

- availability of financials;

- credit history

5. What will the lenders need to know about you?

It’s not unusual for a home loan application form to take up to 10 pages. There are four main points lenders look for:

o Your capacity to repay.

o Your security property .

o Your existing assets.

o Your existing liabilities.

Some of the questions you can expect to be asked are:

o Your dependent children.

o How long have you lived at your current address?

o What do you owe and own?

o Your accountant’s details.

o Your personal insurance.

o Your credit cards.

6. Supporting Documentation for Your Loan Application

When it comes to the documents you need to support your application, most lenders are likely to ask for the same information. And yes, it is harder if you’re self-employed.

A PAYG applicant is expected to provide the following with their application:

o At least the two most recent pay slips, and group certificates for the past two years.

o A letter(s) from your employer(s) detailing income (for the past two years) and length of employment,

A self-employed applicant will need to submit:

o Past two years’ tax returns and your accountant’s details, or past two years’ financial statements and your accountant’s details. Some institutions may even ask for a profit and loss statement certified by a registered accountant.

Saving details:

o Bank statements including transaction, saving or passbook accounts.

o Investment papers including managed funds or term deposits.

o What you owe and own.

o Details of personal loans, credit cards or charge cards. Up to six months of statements should be produced to support these loans.

o Tax liability (if self-employed).

Life insurance policy details.

o Superannuation details.

o Approximate value of other assets such as furniture and jewellery.

If you do not have the necessary documentation - do not despair. You may be able to borrow under you lender’s Low Doc or a NO Doc program. While your LVR will be slightly lower than with the Full Doc loans(65% - 90%), the loan application process will be far more straight forward.

7. How much can you borrow?

The amount you can borrow depends on what you’re buying and how much money you have left when you take out all your fixed commitments from your net income. All lenders have their own affordability calculator which they will use to qualify your application.

If you’re buying a home, most lenders will let you borrow up to 80 percent of the purchase price, or 95 percent if you are willing to take on mortgage insurance. Mortgage insurance is designed to protect the lender. A number of online calculators can help you determine how much you can borrow.

Some lenders even offer 100% or more of the purchase price. However these loans are quite difficult to qualify for and require a perfect credit history as well as strong financials.

8. Don’t Forget the Loan and Purchase Fees.

You should be aware of all the fees and charges that come part and parcel with a new home as well as with a new home loan. There’s much more to it than just a deposit. To avoid any last-minute surprises you need to ensure that you have enough to cover the cost of conveyancing, applicable stamp duty on purchase as well as stamp duty on mortgage. There are also various application fees, lender valuation fees and even possible mortgage insurance fees (depending on your Loan to Value Ratio - LVR).

Maya Pavlovski holds a Bachelor of Commerce Degree from Melbourne University and is a qualified CPA

If you would like to learn more about the your Home Loan Options please visit
www.webdeal.com.au or

www.honeyloans.com.au

Tags: Borrow, home loan, Loan Costs, loans, Low Doc Loans, LVR, Mortgage, No Doc LoansBorrow, home loan, Loan Costs, loans, Low Doc Loans, LVR, Mortgage, No Doc Loans

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