November 3, 2010
New research from RateCity shows that despite a decrease in the number of low-doc loans available, the number of applications is on the rise.
Before the GFC hit our shores there was an abundance of low-doc home loans available, however the effects of the GFC saw the numbers decline dramatically.
From October 2007 until October this year the number of low-doc loans available decreased by approximately 45 percent from 345 to 191, RateCity found.
The research also showed that while the number of low-doc loans available has declined, the number of applications for low-doc loans have increased by 58 percent since September 2009.
The reasons for these changes
Targeted at the self-employed and borrowers who can’t prove their income, low-doc loans are considered a high risk to lenders and as a result many financial institutions tightened their lending criteria during the GFC.
In addition, lenders mortgage insurance company Genworth Financial added extra conditions to their policy. Mortgage insurance is a cost that all borrowers must pay to lenders if they borrow more than 80 percent of the purchase price.
“In response to market conditions,” Genworth Financial acting CEO Paul Caputo says, “from late 2008, borrowers wishing to take out a low-doc loan had to provide recent BAS statements (the last 12 months) to allow Genworth to better assess their income potential.
They also require an active ABN for at least two years and GST registration for at least 12 months.”
While this means that more paperwork is required from borrowers, by meeting this high criteria your application should be stronger and hopefully more likely to be approved.
Rates for low-doc loans have decreased
It’s not all bad news for the self-employed because rates are cheaper. RateCity found that the self-employed are getting a better deal than before. For instance, the average advertised variable rate for low-doc loans has dropped by 1.36 percentage points in October 2010 compared to October 2007. This is while the average standard variable rate across more than 100 lenders on RateCity’s database has increased by 11 basis points to the current average of 7.05 percent.
So whether there are 1000 loans to choose or a dozen you can still find a good value deal by comparing home loans online. For instance, one of the best low-doc home loans on RateCity for a $250,000 loan is at 6.59 percent, which is 1.36 percentage points lower than the current average rate of 7.95 percent.
If you compared the repayments for a $250,000 loan you could save $219.17 per month, or around $65,751 over the life of a 25-year loan by choosing the lower rate low-doc loan.