What is the Difference between a Low Doc Loan and a No Doc Loan?
In recent years, one of the fastest growing segments of the Australian mortgage market has been the no doc loan. These are loans for which borrowers are able to “certify” their income by alternative methods 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 2% 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 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 15% 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 $1 million 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.
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.
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 loans are similar to Low Doc 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.
Borrowers pay for the flexibility and privacy of these types of mortgages. A clean credit is not always required. 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:
o Self Employed applicants whose financials are not up-to-date;
o Financially independent people with complex asset and income structures;
o Retirees who live off investments;
o People whose lives are in a flux because of divorce, recent death of a spouse, or career change
If you would like to read more about the Low Doc and No Doc Home Loan products available in Australia, please visit Low Doc Mortgages.