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Low documentation (Low doc) & No documentation (No Doc) loans are aimed at self employed people whose reported income or lack of tax returns make it difficult for them to show they can service a loan based on their personal tax returns via normal bank procedure.

The difference between Low doc & No Doc

The difference between a Low doc and a No doc loan is the amount of information that is provided.

With a Low Doc loan you are still required to provide everything associated with a normal loan eg current loan statements, credit card statements etc. The only thing you do not provide is up to date tax returns. With a No doc loan you don’t produce anything. It is effectively an asset lend against the security being offered.

In terms of what the banks offer the difference between the loans varies from lender to lender but can generally be summarised as follows:

• In many cases a No Doc loan is offered at a higher interest rate to compensate for the higher level of risk.
• The amount most lenders will lend for a No-doc loan against any given asset is generally lower (60% LVR) and may have a lower limit in absolute dollar terms.

How does it work?

In both cases instead of providing up to date tax returns you are required to sign an income declaration stating that you can service the loan.

Borrowing limits and Lenders Mortgage Insurance (LMI) for Low doc / No doc loans

Due to the additional risk involved to the bank the amount you can borrow is generally also limited. For Low doc loans the maximum amount that can be borrowed is generally 80% of the value of the security property. For No doc loans the limit is generally 60% of the value of the security property.

With regards to LMI for low doc loans it is more expensive than normal loans. Depending on the lender it will be payable on loans of 60 – 65% and above. Generally for No Doc loans LMI is not available and thus the lower LVR limit per security property.

Features

Most Low doc and No doc loans generally offer most of the same options as a standard variable loan.

Important Warning: Within the last 12 months the Australian Taxation Office has taken over 100 Low doc loan files from banks using its powers to investigate tax evasion. Whilst all care is taken you need to be aware that any documentation provided or declared may be collected at some point.

For example if in 4 years time you have only declared that you have been earning $20 000 per annum but you have been servicing a $600 000 loan the ATO may use your loan records to ask you to explain how you serviced such a loan given your declared income.