Pros and Cons of Low Doc Loans

Prior to the Global Financial Crisis, it was far easier to borrow money without providing any significant financial documents such as tax returns or financial/trading statements. These loans, called Low Doc loans, are still around but have become a little more difficult to obtain due to the Lenders changing their lending criteria and with the added responsibility of the new credit act.

Low Doc loans are suited for those applicants who are self employed and cannot provide the usual required two years tax returns or trading statements. This may be to a number of reasons, possibly including that they simply haven’t yet been prepared yet. This is where low doc comes in handy and it is a very popular product even so today.

Pre GFC, applicants could borrow up to 90% LVR (lending value ratio) against their security with only a stated self certified income form signed and an accountants letter to confirm this income. And at 60% LVR, an applicant could have borrowed funds without needing income to be verified. This was called a No Doc for obvious reasons.

Fast forward to today and Low Doc has changed a little. Most lenders are now asking for BAS (trading statements) to verify the income that has been provided on the self certified form. If BAS can be provided, then the lender will use a maximum of 40% of annual turnover as income. It is almost a product now that is in between the old low doc policy and a fully verified loan.

There are still lenders however, that do not ask for BAS to verify income. Maximum LVR remains at 80% and the application needs to be fairly clean, which means good repayment history if you are refinancing and definitely a clear credit history. If there is some kind of detrimental aspect to the application, then more than likely BAS will need to be provided.

If the LVR is kept below 60% then there won’t be a fee, however is you borrow between 60% and 80% then the lender will add on a ‘risk fee’. a fee, that was not involved in at this LVR pre-GFC.

All in all, the low doc is still a great product as the interest rates can be very competitive to the fully verified rates, and great for those self employed applicants who cannot fully verify their income.