What is a low-doc or no-doc loan?

Low doc loans, or no-doc loans are loans offered by lenders (banks, financiers, etc) to borrowers who aren’t able to provide full documentation for a mortgage or loan.

Situations where borrowers may not have the full documentation available are due to being self-employed, not earning a regular income (e.g. contractor, causal, seasonal or cash work) or being retired. These borrowers may not be able to provide payslips or PAYG statements to show ongoing income.

Are the loans different to full-doc loans?

As the name suggests, these loans require less documentation for approval than would normally be required for a loan. Instead of payslips or PAYG statements, borrowers can provide business activity statements, bank statements or tax returns as proof of income.

Low-doc or no-doc loans have traditionally been used and abused by banks, mortgage brokers and borrowers and banks, due to these minimal documentation requirements, to provide loans to borrowers who can’t actually afford them.

Are low-doc or no-doc loans more expensive?

The short answer is yes, low-doc or no-doc loans usually are subject to a higher interest rate than standard loans. This is due to the banks taking on a higher level of risk with the loan.

Borrowers may also be required to provide a substantially higher deposit for the loan, either through equity in another security they own or through personal savings.

Why the increased cost?

The higher interest rate or deposit amount required is due to the loans being generally a much higher risk for the lender. Reserve Bank of Australia statistics show that borrowers using these loans are four times more likely to default on payments over those with standard mortgages.

Weren’t these types of loans restricted?

Yes. Following the 2008 global financial crisis, a Senate inquiry into low-doc loan approvals for people who could not afford them led to tighter regulations on their use and approvals.

True no doc loans are no longer available, the alternative option is a bank statement loan.

What are the key take outs?

If your income is not regular or is hard to prove, a low doc loan or bank statement may be an option for you.

However, keep in mind there will be additional costs associated with this, and approval may be more difficult than a full-doc loan application.