While being self-employed has its advantages, it can make applying for a standard home loan a more complicated.
Without access to regular payslips or salary documentation, low-doc home loans give freelancers, contract workers, investors and self-employed borrowers the option of applying for a home loan with less documentation than standard home loans.
What is a low-doc home loan?
Low-doc home loans get their name from providing low documentation. For borrowers that are self-employed, those who freelance or own their own small business, getting access to payslips and group certificates can be challenging. The lack of traditional documentation can make applying for a standard mortgage 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.
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.
Back in the 1990s, mortgage brokers recognised that not all lenders fit into one category. Discovering a valuable niche in self-employed lending, they tapped into this group of viable borrowers and created a new category of home loans called low-doc home loans.
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, freelancers and small business owners with the ability to provide different kinds of proof of income documentation when applying for a home loan.
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.
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 loans.
While each low-doc home loan lender will have their own rules and conditions, self-employed borrowers will generally have to provide at least two years of personal tax returns, business activity statements (BAS), profit and loss statements, and in some cases an accountant’s letter verifying their financial position.
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. Here’s what to look out for when comparing low-doc home loans.
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. While the fixed interest rate is usually higher than a variable rate, it will give you the certainty of making set repayments for a fixed period. Your other option is to pick the variable rate and wear the risk that rates may rise, which will make your repayments more. Some low-doc home loans offer a split rate option which lets you split part of your loan between both a fixed and a variable interest rate.
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.
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.
For example, you might want a loan that allows you to make additional 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 offer this feature, but charge a small fee for it.
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. You can use your redraw facility to pay for things such as small renovations or a car. While the money is there to be redrawn, remember that you’ll still have to pay it back and it may push your repayment amounts up. As low-doc home loans generally tend to have lower interest rates than credit cards and personal loans, it can make more financial sense to use the redraw facility than applying for a personal loan.
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 will 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, 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.
Given that low-doc home loans are generally riskier from a lender’s perspective, the bank may require a bigger deposit than a standard 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. To avoid any extra charges, take note of the LVR and deposit requirements.
Other low-doc home loan features to look out for are loan portability which lets you take your low-doc home loan with you when you move. Depending on our 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 home loan?
Once you’ve compared your low-doc home loan options and found a loan that suits you, you will need to gather your documentation before you apply. While each lender has their own 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)
- Proof of registration of GST
- Personal and business bank statements
- A declaration from your accountant verifying your income