Low Doc Home Loans are suitable for people (most commonly self-employed or casual workers) who can afford to take out a home loan, but are not in a position to prove their income, have variable income, or do not have tax returns or financial reports. Instead, the borrower signs a self-certification letter in which they state what their income is (or is projected to be for that financial year), and in which they also declare that they will be able to meet repayments. The term 'Low Doc' thus reflects the fact that these loans are possible with 'Low Documentation'.

Overview

Low doc home loans may allow certain borrowers to get a mortgage when otherwise this would not be possible. As such, they play an important role in providing those borrowers opportunities for buying property which would otherwise not be afforded to them. They may be a very option for you, or they may not be. You will need to make an assessment for yourself as to whether this kind of loan is suited to your needs. Whilst your Capital West mortgage broker cannot make this assessment for your or provide advice as to whether this would be a prudent choice, they will none-the-less be able to inform you of all aspects relating to the various low doc products.

The following represent a quick overview of things you should be aware of with regards to low doc loans:

a) Less paperwork: Instead of tax returns or financial reports, the borrower sign a self-certification letter in which they indicate what their income is, and that they can afford the loan.

b) Generally, you will require a larger deposit, if you want to avoid LMI costs. LMI is discussed further at the bottom of this page.

c) LMI costs may kick in sooner with low doc loans, and this can add considerably to the cost of establishing the loan. Interest rates are somewhat higher for low doc loans than standard loans, although many lenders will bring these into line with standard loans, once you have a history of having met your repayments on time.

d) Certain lenders may not lend in high risk areas such as inner city high-rises or large rural allotments.

Types of Low Doc Home Loans

Low doc loans can be classified into three main categories. The categories differ from one another primarily with regards to a) the evidence required and b) the interest rates offered. This reflects the risk that lenders take when offering their loan products.

1. Self declared income: With this kind of low doc home, the borrower completes a self-certification letter in which they declare their income, with no accompanying evidence. Interest rates are generally somewhat higher than standard home loans.

2.Account statement: This kind of low doc home loan requires a little more than a self-certification, such as a letter from an accountant. The risk level to the lender is reflected by the fact that interest rates are more in line with standard home loans.

3. Asset lend: This kind of low doc home loan requires the least documentary evidence to be presented, and in certain situations no signed declaration is even provided. The loan is secured virtually entirely by the property being purchased. Interest rates for these kinds of loans can be substantially higher than standard loans.

Costs and Features

Whereas once low doc home loans had few features and considerably higher interest rates than standard home loans, these products have moved much closer to standard loans in recent times. You should however, have realistic expectations; in many cases the interest rate will be higher than standard rates. This reflects the fact that lenders take on a greater risk with this kind of loan. They must therefore be compensated for taking on this higher level of risk, and this is reflected in the interest rates payable.

The application/establishment costs many low doc home loan products are generally comparable with standard home loans.

Although the application/establishment costs of many of the products which our low doc lenders offer are comparable with other products, you may be required to pay Lenders' Mortgage Insurance (LMI). This can be a considerable expense. Generally, when you borrow more than 80% of the value of a property, lenders will require you to pay Lenders' Mortgage Insurance. In these cases, the lender is taking on a greater risk on a given property, and the taking out of an insurance policy protects them against this risk.

You should be aware though, that whilst this insurance protects the lenders, it is in fact you, the borrower, who needs to pay for this. With low doc home loans, this Lenders' Mortgage Insurance often kicks in at a lower rate (sometimes even as low as 60%). This can add considerably to the cost of a low doc home loan, although this is a one-off expense, and not a yearly or continuing cost. Your Capital West mortgage broker will be able to answer any questions you may have with regards to Lenders Mortgage Insurance on low doc home loans.