A Lo-Doc loan could be suitable for many different scenarios, in this article I hope to help you identify if you qualify for a Lo-Doc Loan.
Working for yourself can be extremely rewarding – I’ve personally loved the change and the freedom it’s allowed me. But when the time comes, and you need to apply for a home loan, being self-employed can be a red flag to banks and lenders. I bet you’re nodding, but you’re puzzled and want to know why.
A PAYG or salaried employee has a regular and steady income and is less likely to have the cash flow volatility of a small business owner, entrepreneur, contractor, tradesperson or freelancer. While you can surely gain access to all the same “Prime” or Full-Doc home loans as a PAYG or salaried person, it’s still common for self-employed borrowers to look at Alt-Doc (Alternate) or Lo-Doc (low documentation) home loan options. Why is this common? Because being self-employed can mean you have complicated business financials that may not tell the full story.
What is a Lo-Doc Home Loan?
Commonly, Lo Doc home loans are available for self-employed borrowers who are unable to provide full financial statements or tax returns to verify their current income. Effectively, you can declare what your income is by completing an income declaration form. I would always recommend that your Accountant does this after consulting them about your plans for new lending. An income declaration offers flexibility especially if you’re borrowing money at a time of the financial year when you haven’t yet completed all your financial statements.
A Lo-Doc loan could be suitable for the following scenarios:
- Self-employed with ABN registered for two years or more
- Financials not yet completed
- Financials are not reflecting the full story
- ABN registered for less than two years
- Business is showing varying annual income, usually by more than 20% up or down on the previous year’s numbers.
The Pros and Cons of a Lo-Doc Home Loan
With the minimal income documentation required, one of the perks of taking a Lo-Doc loan is that the approval process is more straightforward and therefore can be quicker!
While interest rates can be higher; you usually have the option to transfer over to a traditional loan and therefore a lower interest rate once you can provide conventional forms of income documentation again.
Most Lo-Doc loans have all the features of standard variable and fixed-rate home loans. Meaning, options like a 100% mortgage offset account are available so you can enjoy the interest saving benefits.
Interest rates can be somewhat higher than Prime or Full-Doc (Documentation) loans.
For example, different banks and lenders can have different limits on the amount they will lend you. You generally won’t be allowed to borrow more than 80% of the property value, meaning you will need a more significant deposit.
Why is my interest rate higher if I take a Lo-Doc home loan?
Banks and lenders who offer Lo-Doc loans, base their decisions about rates on the perceived risk level involved. If lenders are prepared to accept a higher risk by lending you money without you providing current financials, naturally they can charge a little extra depending on your situation.
Some of the Acceptable Purposes for the use of Lo-Doc Home Loans are:
- Investment loan
- Purchase an owner-occupier property
- Refinance and debt consolidation
- Business cash flow
- A renovation or home improvements
- Purchasing a new vehicle, either for personal or business use
- Building your dream home
- There could well be many other purposes. Your best option is to stay running your business, give us your scenario, and let us at LoanPlanners SA research for you
Here’s a recent Lo-Doc client example:
Fred and Wilma Flintstone – (Names changed for privacy reasons.)
Delivery Drivers during the day – Wedding and Club DJ by night.
Fred’s father had just passed away, and the family home was being left to Fred in the will. The home still had debt on it, which meant that Fred and Wilma would also assume that debt. It also needed some TLC by way of a whole home renovation. Fred and Wilma, therefore, had to service this remaining debt with the lender so they wouldn’t have to sell the home.
Fred and Wilma are both delivery drivers, contracted by a single company by day and Fred is also a Wedding DJ on the weekends. He does the odd club set too. Fred and Wilma’s income consisted of many invoices being paid to them every month. It was easy to see their income, but it was not consistent enough for a bank or lender to use it for servicing in a traditional sense. Using the option to self-declare their income via a Lo-Doc loan meant that Fred and Wilma were able to service the existing loan and also do an increase so that they could do the renovations in the home.
Credit Representative 432231 is authorised under Australian Credit Licence 389328.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.