What is a Low Doc Home Loan?
Low Doc (short for Low Document) home loans are a recent innovation
in Australia and are targeted at contractors and the self-employed, who
often lack current tax and financial records. Traditionally it has been
more difficult for the self employed to obtain loans because banks had a
preference for borrowers on guaranteed (ie PAYE) incomes.
The Low Doc Home Loan helps borrowers with irregular cash flow or who
may not have current financial statements, providing they have
sufficient equity in an existing property or other assets.
Low Doc loans can be variable or fixed rate loans, or lines of credit,
and may include an offset facility.
Low Document loans attract a higher rate of interest than other types of
loans because lenders perceive the risk involved to be greater.
Because the employment situation in Australia is changing, bank and
non-bank lenders have had to become more flexible in their approach to
lending and so Low Doc loans are becoming more common.
Features of Low Doc Loans
The Low Doc loan is usually just a standard fixed or variable rate loan,
but with different credit criteria i.e. low documentation.
Since full documentation is not required the risk to the lender is
higher and this is reflected in the interest rate and maximum
loan-to-valuation ratio (LVR) of 65 - 80%. Interest rates are often 0.5%
to 1% higher than standard loans depending on risk but competition is
bringing rates down and the rate is often reduced once you have
established a good track record of repayments. Lenders Mortgage
Insurance is not normally required on loans under 80% LVR.
Other useful features can include offset accounts, redraw facility,
direct salary crediting, portability and repayment options depending on
the lender and type of loan.Benefits of Low Doc Loans
- Specifically designed for self-employed and contactors with good
credit records.
- Low documentation requirement (This does not mean no
documentation!)
- Feature rich depending on type of loan selected
Tips and strategies
- Shop around because interest rates and LVR can vary
significantly between lenders
- Avoid loans with monthly account fees
- Making weekly or fortnightly repayments pays your loan off
faster than monthly payments because you are making 1 or 2 extra
repayments per year
- When interest rates drop retain current repayment levels
- Have your personal income paid into your loan account to reduce
interest and use the interest free period on a credit card for
purchases before paying the credit card bill from the loan account
- Put lump sum payments like tax refunds into your loan account.
If required later, use the redraw facility.
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