What is a low doc home loan?
Low doc (or low documentation) home loans don’t require the standard proof of income and employment that regular home loans do. They are designed for self-employed individuals, contractors, business owners, and other ABN holders who don’t earn a fixed salary.
Low doc loans offer a solution in cases where the borrower cannot provide payslips, tax returns or employment contracts to prove they can afford a home loan.
While low doc loans can be suitable for certain borrowers, there are drawbacks including higher rates interest and fees than the average home loan. This is on account of the higher level of risk for the lender when offering a low doc home loan.
In other ways, low doc home loans are the same as any other loan. For example, there are:
- Fixed and variable rate options
- Principal and interest or interest-only payments
- Loans for owner occupiers as well as investment loans
While Australia’s major banks offer low doc home loans to eligible self-employed borrowers, their requirements still tend to be stricter than those of smaller, specialist non-bank lenders.
Low doc vs alt doc vs no doc home loan
The terms 'low doc', 'alt doc' and 'no doc' are sometimes used interchangeably, but they generally refer to different document requirements when applying for a home loan:
Low doc home loan
Requires a reduced amount of proof to demonstrate to the lender that you can afford the repayments on the loan.
Alt doc home loan
An alt doc loan offers flexibility in which kind of documentation you can provide when applying for the loan, but there could still be strict eligibility criteria.
No doc home loan
These are home loans that require the absolute bare minimum of proof. For example, a borrower might only need to provide a statement of income signed by themselves and their accountant.
According to Money’s home loans expert, Mansour Soltani, the less documentation you provide with your application, the more your loan will cost.
Mansour Soltani , Money's home loan expert
“There's a product out there for every need. Every borrower will be in a different scenario in terms of what they can and can’t show the lender, and there are some low doc lenders who will ask you for next to no documentation. But they'll charge you for the privilege.”
Mansour Soltani , Money's home loan expert
Who uses low doc home loans?
Low doc home loans are designed for ABN holders who are registered for GST. Some lenders require a minimum trading duration, e.g. 6-12 months.
Here are some examples of borrowers who commonly seek out low doc home loans.
1
Self-employed people and contractors
Particularly for borrowers who have only recently become self-employed, chances are a low doc loan will be required. Some lenders are more likely to accept an applicant if they have previously been a PAYG employee in the same industry.
2
Small-business owners
It’s common for businesses to have volatile income and profit levels, making it difficult for the owner to demonstrate a reliable income to a lender. For example, if revenue was lower than usual in the past 12 months (or expenditure was higher than usual), a business owner may need to prove they can afford a home loan through other means.
3
Bad credit borrowers
“Some low doc lenders don't check your credit rating,” Mansour explains. “They look at other things, such as whether your accountant is willing to sign off on your loan through an accounts declaration.” For this reason, a low doc application is a common option for those seeking a bad credit home loan (aka, ‘near prime’ loan).
The following low doc borrower examples are based on Mansour’s clients who required assistance with their application.
Low doc home loan examples
Business owner with high capital expenditure in last 12 months
"A client of mine who runs a funeral parlour just bought another site for his business and he spent $300,000 renovating it. This hammered his borrowing capacity when applying for a home loan.
"If you're a business owner and you've had a lot of capital expenditure that year, a low doc loan can be worth looking at. It means you have flexibility over how you can demonstrate that you can afford the loan. What your business was doing in any given year becomes less of a determining factor."
Borrower who had pursued a 'tax minimisation strategy'
"For some borrowers I work with, a reason why they don't want to show documentation to the lender is they've been minimising their income to reduce their tax bill.
"So their accountant’s been really creative with their accounting and pushed their income right down.
"The problem is when you then go to the bank and you say 'here's my income tax return', they’ll say that’s not enough for us to give you the loan you want.
"In that case, a low doc loan means the borrower might not need to show tax returns. Instead their accountant can sign a document stating they can afford the loan."
Low doc home loans vs standard home loans
Income requirements | |
Low doc home loan | Flexible (fewer) income verification requirements. |
Standard home loan | Full documentation required to prove your income. |
Maximum loan-to-value ratio (LVR) | |
Low doc home loan | Usually up to 85% but varies by lender. |
Standard home loan | Usually 95% (with lender’s mortgage insurance). |
Interest rates | |
Low doc home loan | Depends on the application but generally high compared to standard loans. |
Standard home loan | Lower than low doc rates but vary based on the LVR and other factors. |
Fees | |
Low doc home loan | Usually higher than standard loans. Additional ‘risk fees’ may apply based on a percentage of the loan amount. |
Standard home loan | Standard home loan fees apply. |
Application | |
Low doc home loan | Some lenders only allow applications through a mortgage broker. |
Standard home loan | You can usually apply directly with a lender or through a broker. |
| Low doc home loan | Standard home loan | |
|---|---|---|
Income requirements | Flexible (fewer) income verification requirements. | Full documentation required to prove your income. |
Maximum loan-to-value ratio (LVR) | Usually up to 85% but varies by lender. | Usually 95% (with lender’s mortgage insurance). |
Interest rates | Depends on the application but generally high compared to standard loans. | Lower than low doc rates but vary based on the LVR and other factors. |
Fees | Usually higher than standard loans. Additional ‘risk fees’ may apply based on a percentage of the loan amount. | Standard home loan fees apply. |
Application | Some lenders only allow applications through a mortgage broker. | You can usually apply directly with a lender or through a broker. |
How to apply for a low doc home loan
1. Book a consultation with a home loan specialist or mortgage broker
This step isn’t always necessary with a standard home loan, but almost always is with a low doc application. This will allow your lender or your broker to understand your situation and, based on that, which loans you’re likely to be eligible for. At this stage they will also let you know what documentation you will be able to apply with.
2. Submit an application form
This will include information about yourself (plus any joint applicants), your business, assets you own, other debts and dependents you have, plus details about the loan you’re applying for (e.g. loan amount and duration).
3. Provide supporting documents
You’ll also need to submit any documents you discussed with the home loan specialist or your broker. This often means speaking to your accountant to request documents or signed declarations.
4. Property valuation and contract of sale
As a final step in the application process, the lender will arrange a valuation of the property you’re buying to ensure its value is high enough relative to the loan amount. You’ll also need to provide a contract of sale for the property. If the lender is satisfied, your loan will be approved and the funds released to the seller (a process known as settlement).
Documents needed for a low doc home loan
The documents you’ll need to submit will vary based on the lender and your situation. The time frame covered by the documents can also range from 6 months - 2 years or longer.
Generally speaking, lenders may accept the following documents (or a combination of them) as proof of eligibility:
- Proof of ID (passport, driver’s licence)
- Most recent Personal Tax Return and Notice of Assessment (NOA)
- Statement or Tax Return
- Business bank account statements
- Proof of ABN and GST registration
- PAYG Payment Summary/'Tax ready' Income
- Business Activity Statement(s) (BAS)
- Financial statements executed by an accountant
Plus...
- An income statement signed by you and your accountant declaring your financial position and that you can afford the loan repayments.
Low doc approval based on income declaration
Mansour Soltani , Money's home loan expert
“I'm helping a client at the moment where he's going to sign an income declaration and his accountant is going to sign a declaration. The lender views that as two income verifications, but will charge a risk fee and a high interest rate. If you want a lower risk premium, you'll need to provide more verification, such as bank statements showing how much money is going into the account. Basically you can choose how much documentation you want to hand over – just remember the lender will choose an interest rate to match.”
Mansour Soltani , Money's home loan expert
Remember, if you need to apply for a home loan with minimum documentation initially, you can always refinance it to a better rate down the track when your business is more established or in a more stable financial position.
Low doc home loan features that can save you money
Low doc home loans are usually available with all the same features that regular loans have. And given rates and fees are usually higher on low doc loans, getting a loan with features that can minimise interest costs is usually a priority for borrowers.
- Repayment flexibility: Many contractors, business owners and self-employed people have irregular income, sometimes with large one-off payments coming in at once. Having the flexibility to put these lump-sum payments towards your mortgage (without penalty fees applying) could help you pay it off quicker and reduce the amount of interest you pay.
- Redraw facility: A redraw facility allows you to access any extra repayments you’ve made on your home loan if you need cash.
- Offset account: A low doc home loan with an offset account reduces the amount of interest charged on the loan by linking a savings or transaction account to the loan. Interest is calculated on the loan by deducting your offset account balance from your home loan balance. If you’ve got savings or other cash sitting on the sidelines, an offset account could save you thousands of dollars over the life of the loan.
Learn more about how a home loan offset account and redraw facility differ.
