Low Doc Loans are a type of loan offered to assist the large numbers of people who do not have the normal evidence of regular or sufficient income that is needed to get a traditional loan. That is certainly not to say that the applicant doesn’t have the income – they will normally just lack the standard documentary proofs, such as payslips or tax returns. In a low doc scenario, the applicant instead proves his or her income through a self-declaration, and normally this is supported by a declaration or letter from their accountant.
A low doc loan can be extremely useful for those who may have a deposit or equity, and will normally only be available to self-employed applicants. However, although they can be a great tool for those in this position, the low doc concept is often manipulated due to the ease with which people can get a loan declaring money which they haven’t declared to the ATO. Not only has this practice put extra governmental attention on these loans, these illegal practices have increased the documentation now required by everyone, so the process is much more onerous than it once was.
The downside to this type of lending is the extra costs – often there are higher upfront fees or a higher interest rate on the loan. Additionally, mortgage insurance is almost never applicable to these loans so the maximum amount that can be lent to applicants is often limited to 80% of the value for residential property or 60% for rural, therefore the deposit or equity required can be very large.
What you will need to apply will depend very much on the lender, as there are vast differences between their definitions of how low is Low Doc. All will need to get your ABN and, depending on the deal, you may also need to be GST registered. Additionally, most will need you to have had your ABN for at least two years, while some banks will also require BAS statements or trading statements. You still need to show your asset and liability position, however statements are often not required to prove the conduct of any liabilities. For the required declaration, your accountant will also need to sign to confirm the amount you’ve declared you earn, or they may have to write a letter to the same end. One big point is that your accountant needs to be a registered tax agent – so for the numerous small businesses that do their own taxes, you’ll need to change how you operate and start to use a tax agent with at least a year’s declared history of your relationship, if you think you’ll need this loan structure.
Low doc loans are a great alternative for the self-employed, but they’re certainly not always perfectly suited to everyone, and the differences between lenders also change the game, so you’ll need to shop around or have a broker help you out.