March 22, 2010
A growing number of Australians take up the option of self-employment each year, and for many, a ‘low doc’ loan offers the key to home ownership. Chris Walker reports.
Low doc home loans are pitched specifically at borrowers who can’t meet lenders’ traditional proof of income requirements. Instead of asking for pay slips or employment contracts, low doc lenders will typically ask to see a set of financial accounts. In some cases, the borrower may only have to sign a statutory declaration confirming their income.
As self-employed workers tend to face a more variable and potentially less secure income than employees, low doc loans are seen as a higher risk investment by lenders. Reflecting this, the interest rate is higher than for standard home loans – in some cases up to 1 percent more. The upfront fees can also be steep, sometimes topping $1,000, so it pays to use the comparison rate (which incorporates initial and ongoing charges) when shopping for a low doc loan.
Borrow more = cost more
The lending limits on low doc loans can be quite restrictive. Some lenders impose an upper cap of 80 percent of the property’s value, and if you borrow more than 60 percent of the property’s value, lenders mortgage insurance may apply. The bottom line is that self-employed workers may need a considerable deposit to qualify for a loan.
As “responsible lending rules” are phased in from mid-2010, it’s possible these limits along with the lending criteria for low doc loans could become even tougher. Already, the low doc market has downsized as a result of the global credit crunch.
In 2007 self-employed borrowers could choose from around 180 loans across 47 providers. This range has narrowed considerably, and while there is still a reasonable selection of low doc mortgages, it does highlight the need to choose a low doc loan with care. If you want to refinance further down the track you could find the range of available options has narrowed even further.
Insure your mortgage future
If you run your own show, it’s possible to improve your chances of loan approval by supplying an ABN and having a decent set of financial accounts that show your income is sufficient to repay the loan.
It’s also worth having income protection insurance. In a survey by mortgage insurer Genworth, 38 percent of respondents cited illness as a key cause of difficulty meeting home loan repayments. Without the backing of sick leave, home ownership could become a nightmare for self-employed borrowers who can’t work due to sickness or injury.