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What is a low-doc home loan?

Low-doc home loans get their name from requiring low documentation compared to other home loans. In other words, you can apply for a low-documentation loan without providing the same kind of paperwork as a more traditional full-doc loan. Because you often use alternative paperwork to apply for these loans, they are sometimes also known as alt-doc loans.

For borrowers who are self-employed, those who freelance or own their own small business, getting access to payslips, PAYG payment summaries and group certificates can be challenging. The lack of traditional documentation can make applying for a standard home loan a little trickier. That’s where a low-doc home loan comes in, giving non-traditional borrowers access to home loans minus the usual documentation.

Until low-doc home loans came along, getting access to a mortgage was difficult for non-traditional borrowers. What low-doc loans do is provide self-employed Australians, freelancers and small business owners with the ability to provide different kinds of proof of income documentation when applying for a home loan.

How much documentation is required for a low-doc loan?

Although they may require less documentation than standard home loans, low-doc home loans still require sufficient proof that you will be able to service the mortgage repayments. After all, they are called low-doc home loans, not 'no-doc' home loans.

There's no hard and fast answer to how much documentation you'll need, but it will ultimately depend on the strength of your documentation in proving your income and financial position.

If you're interested in learning more about what this might mean for your personal circumstances, consider reaching out to a mortgage broker.

Who are low-doc home loans for?

Low-doc home loans are generally designed for self-employed borrowers who have the deposit and income to be able to pay off a mortgage but may not have all the standard documentation to prove it.

This may include:

  • Self-employed people
  • Small business owners
  • Freelancers
  • Sole traders
  • Contract workers
  • Seasonal workers
  • Casual workers
  • Professional investors
  • People with bad credit
  • Recent arrivals to Australia

With the number of self-employed borrowers on the rise, the increasing demand for low-doc home loans means there are a lot more options available for non-traditional borrowers. With low-doc home loans now available from all sorts of lenders, it’s important to compare your options and find the best low-doc home loan for you.

Does low-doc automatically mean high rate?

As self-employed borrowers generally don’t look as solid on paper as more traditional employees with pay slips, banks and lenders offering low-doc home loans will often insist borrowers pay a larger deposit, and some low-doc home loans may have higher interest rates than traditional financial products. Having an excellent credit history can also help to maximise your available options.

What do I need to apply for a low-doc home loan?

While each low-doc home loan lender will have their own rules and conditions, some of the documents that self-employed borrowers may be required to provide include: 

  • a signed Borrower’s Income Declaration stating your usual income;
  • a registered business name;
  • evidence of Australian Business Number (ABN) registration;
  • evidence of GST registration;
  • personal tax returns;
  • business activity statements (BAS);
  • profit and loss statements;
  • business bank statements;
  • other relevant financial statements, and/or;
  • an accountant’s letter verifying their financial position.

Can I refinance with a low-doc home loan?

Refinancing with a low-doc home loan is possible, though the process may be more complex than refinancing a full doc loan loan.

Much like applying for a low-doc home loan, the lender you’re refinancing with will likely want to see some proof of income to confirm that you can afford the mortgage repayments. They may also pay close attention to your credit history, and may prefer that you hold more equity in your property compared to your loan amount, giving you a lower loan to value ratio (LVR).

How to compare low-doc home loans

Low-doc home loans have come a long way in recent years. With many options on the market, there’s no such thing as a one-size-fits-all low-doc home loan. Some lenders may offer specific low-doc home loans, while others may offer a low-doc version of a regular home loan. With so many options on the market, it can be hard to know how to compare low-doc home loans. RateCity's home loan comparison tables can make it easier to compare your options. 

Here’s what to look out for when comparing low-doc home loans:

Interest rate

Start by looking at the interest rate. Depending on the low-doc home loan, you may have the option of choosing either fixed or variable interest rates. 

A fixed-rate option will allow you to set the interest rate for a period giving you the certainty of making set repayments for a fixed term. However, you may not be able to easily refinance your loan during this time without incurring break costs. 

Your other option is to pick the variable rate and wear the risk that rates may rise, which will make your repayments more expensive.

Some low-doc home loans also offer a split rate option which lets you split part of your loan between both a fixed and a variable interest rate.

It's also important to consider the loan's comparison rate, which combines the cost of interest with standard fees and charges into a single percentage figure. This can allow you to quickly compare the overall cost of different home loans.

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Type of loan

When you apply for a home loan, you’ll need to pay back both the principal amount you borrow and the interest. Some low-doc loans may offer an interest-only option, which lets you pay back the minimum amount of interest and not the principle for a fixed period. However, this can often result in paying more over the life of the loan, as you won't be making a dent in the borrow amount. Principal and interest repayments, on the other hand, allow you to work towards paying off your loan.

Loan features

When comparing low-doc home loans, it’s important to look beyond the interest rate. The interest rate is an important factor to consider and compare, but there are many other aspects to weigh up.

Extra repayments

You might want a loan that allows you to make extra repayments. If you’re self-employed or freelancing, there may be periods of time when you’re earning more. In those periods, you may want to use the extra cash to pay down your home loan. A loan that allows you to make additional repayments will let you pay extra into your home loan which will ultimately reduce the amount of interest you pay over the life of the loan. Bear in mind that some loans that offer this feature may charge a small fee for it.

Redraw facility

If your cash flow is unstable or varies throughout the year, a loan which offers a redraw feature may help buffer any ebbs and flows. A redraw facility allows you to withdraw any additional repayments you’ve made into your home loan. As low-doc home loans generally tend to have lower interest rates than credit cards and personal loans, it may sometimes make more financial sense to use the redraw facility than applying for a personal loan.

Offset Account

If you’ve got savings or any extra cash sitting in a savings account, you might want a low-doc home loan with an offset account. An offset account that’s attached to your home loan may help save you interest and potentially shave years off your loan. For example, if you’ve got a $500,000 home loan and a balance of $40,000 in an offset account, you’ll only be charged interest on the balance of $460,000. The amount in your offset account is offset against the loan balance, potentially saving you interest and money over the life of the loan.

Generally speaking, offset accounts are usually only available with variable interest rate low-doc home loans, so before you apply, do your research to find a loan that suits your needs.

Other features to consider

Given that low-doc home loans are generally riskier from a lender’s perspective, the bank or credit provider may require a bigger deposit than a full-doc home loan. When you’re comparing low-doc home loans, look out for the loan-to-value ratio (LVR) percentages. As a general rule, loans that have a LVR of over 80 per cent are required to pay lender’s mortgage insurance (LMI). To avoid any extra charges, take note of the LVR and deposit requirements.

Other low-doc home loan features to look out for include loan portability which lets you take your low-doc home loan with you when you move, instead of refinancing

Depending on your cash flow, you may be able to find a loan that lets you change your repayments from monthly to weekly or fortnightly.

How do I apply for a low-doc loan in Australia?

Once you've done your research, applying for a low-doc home loan should be a similar process to a standard home loan application. Consider using the following steps to help guide you through the application process:

  1. Compare your options: RateCity's comparison tools, such as our comparison rate table, home loan calculators, and Real Time Ratings™ system, can make it easier for you to narrow down your search and create a shortlist of products that suit your needs.
  2. Check the lending criteria: Once you’ve compared your low-doc home loan options and found a loan that suits your needs it's important to check that you meet the eligibility requirements.
  3. Prepare your documents: You will need to gather your documentation before you apply. While each lender has their own home loan application process, they may generally require some or all of the following documentation:
    • Proof of identification
    • Proof you’ve been working in the same industry for at least 12 months
    • A registered business name and an ABN
    • At least 12 months of lodged business activity statements (BAS statements)
    • Proof of registration of GST
    • Personal and business bank statements
    • An income declaration from your accountant
  4. Apply for pre-approval: This is where a lender agrees in principle to provide a loan, but you or the lender can still walk away. It can be a good step to take before you get serious about shopping for a property.
  5. Make an offer on a property: Whether you’re buying at auction or by private treaty, it's important to make sure the price is within your budget.
  6. Credit check and valuation: The lender will check your credit score (based on your history of managing money) and calculate the value of the property to make sure you aren't over-borrowing.
  7. Application approval: If you’re successful, you'll then sign the formal home loan offer and contract.
  8. Prepare for settlement: This final step is the legal transfer of the property from one owner to another. A solicitor or conveyancer can help confirm that everything is done correctly.

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Can a mortgage broker help me apply for a low-doc home loan?

If you're not sure whether a low-doc home loan will be the best option for your financial situation, you may choose to seek the help of a mortgage broker. These home loan experts can look at your personal finances and help you estimate your home loan repayments based on your loan term, interest rate, property value and more.

Mortgage brokers can often be particularly helpful for borrowers who are applying for a low-doc home loan, as this kind of home loan can have tighter lending criteria. They may also be able to help you access low-doc loan options that may not be widely advertised.

Brokers can help you to compare home loan products, and even negotiate with banks and non-bank lenders to help you get a better offer. Finally, a broker can help manage your home loan application, handling the paperwork to help avoid any hold-ups in the mortgage approval process.

How does a line of credit work?

A line of credit functions in a similar way to a credit card. You have a pre-approved borrowing limit and can draw on as little or as much of that sum as you need it, with interest paid on the outstanding balance.

Popular products include Commonwealth Bank Viridian Line of Credit, ANZ Equity Manager, Westpac Equity Access and NAB Flexiplus.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How do you find cheap home loans?

With so many interest rate options and repayment types available, finding the cheapest home loan may depend on the type of loan you choose.

Whether you’re looking for an owner-occupier or investor loan, with interest-only or principal and interest repayments, on a fixed or variable interest rate, the cheapest home loan rate available may vary greatly.

One way to find the cheapest option for you is to narrow down your search and compare the options that best suit your individual requirements. RateCity’s home loan comparison tables can help you get started on your search and take the hassle out of shopping around.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.