DEFINITION & INFORMATION
A Low Doc mortgage by definition is generally a loan up to 80% of the valuation of the property offered by the borrower as security for the loan (not against the borrowers estimate of its value but against an accredited valuer’s assessment – the valuer is appointed by the lender) where the borrower simply signs a declaration as to income and that the loan facility is affordable. Lenders mortgage insurance usually applies to protect the lender between 60 & 80% of the value of the security property. This is the loan to value ratio (LVR). Loans up to 60% LVR generally don’t call for mortgage insurance because the risk is significantly less. Lenders Mortgage Insurance (LMI) are clearly set out in the loan process and are payable by the borrower – in most instances the lender will not agree to this expense being capitalised in the loan. Obviously if the loan is less than 60% LVR this can be accommodated.
A typical Low Doc loan should be based on the actual income of the entity in question whether its a sole trader, partnership or Limited Liability Company (Trusts need to be looked at but if the individuals that operate the business entity are beneficiaries there is usually not a problem). In other words the declaration should involve a fair estimate of the actual income derived from the business or businesses, as the case may be. As a rule all business entities are required to submit BAS statements so that GST and rebate-able input credits can be looked at by the ATO. The BAS statements for a full financial year for any business entity therefore tell the lender the actual income earnt – therefore the so-called Low Doc loan is really no longer a Low Doc loan. A real Low Doc facility by definition is a loan where actual income is not identified.
It could certainly be said that with the lower loan amounts and LVR’s i.e. less than 60% the lenders risk of loss is significantly less – no doubt the reason for nil L/M/I premiums when the LVR is 60% or less. The Major Banks have introduced BAS statements for all Low Doc loan applications irrespective of loan amount (arguably, no longer a Low Doc). One of the Majors offers a higher usage of BAS income depending on the business entity in question but without exception they all require BAS statements for the full financial year for all Low Doc loan applications.
As mentioned previously, the original Low Doc loan was the saviour of self-employed individuals who need to be able to legally minimise the tax that they pay. It must be strongly emphasised that ASIC has no problems with Low Doc home loans.
The only question that arises is, that the Lo Doc declaration has to be signed by the borrower’s accountant – any alteration to the form renders an automatic loan decline by the lender. Please note however, that page 2 of the declaration where the accountant signs contains a very clear statement by him “The accountant makes no warranty that the applicant will be able to make repayments under any loan provided based on this declaration”. The traditional Low Doc loan (without BAS’s) is alive and well – give us a call today to explore your options.