Low-doc loans: are they for you?
If you take out a 'low-doc' (low documentation) loan you won't need to give your lender or mortgage broker as many documents to prove your income, assets and liabilities. You still have to apply in writing and sign your loan agreement, but you may not be required to produce payslips, tax returns or other proof of income that your lender would normally require. You are usually simply asked to state your income - a process called self-verification.
Low-doc loans can help if you would not qualify for a standard loan, but there are usually some strings attached. It's vital that you understand what you're getting into.
Special conditions
In a low-doc loan special conditions may apply. You may have to:
- pay a higher interest rate if you are not able to provide documents about your financial position
- pay additional fees and charges, including ‘risk fees’
- pay for mortgage indemnity insurance
- contribute more of your own money towards the purchase price
- offer additional security for the loan, for example, your car, and
- accept a loan for a shorter period, such as 12 months (which may have to be refinanced at the end of this period with additional costs involved at that time).
Risks
Low doc loans have been aggressively marketed in some cases, to people with a troubled credit history, casual workers or self-employed people who may be in a weaker position when it comes to dealing with the financial risks involved.
With many low doc loans it's up to you to decide whether you can afford the repayments. If you don't give the lender an accurate picture of your finances, the lender will base their decision on whether to offer you finance on whether they can recover the loan from selling your home or other security. Just because they'll give you a loan, doesn't automatically mean the lender thinks you can afford the repayments - you need to decide for yourself.
Such loan products may suit you, but you need to weigh up the extra costs involved. In some cases you may be able to get a lower interest rate if you can give more documentation about your financial history to the lender. Lower costs will usually make you better off in the long run.
Remember too that the mortgage insurance typically required with such loans protects the lender, not you. If forced to sell, you may lose everything you invested in the property and still owe money if the sale does not cover what you borrowed.
Some people may apply for a low-doc loan because they have a lot of income they have not declared to the Australian Taxation Office. If you're avoiding tax you risk getting caught, which can involve heavy penalties.
More information
Loans and credit
Buying a home
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Mortgage brokers
Paying off a loan sooner
Loans, families and relationship breakdown
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FIDO Website: Printed 02/10/2010
