Lo doc loans make a comeback
Self employed? Things to know if you want a home loan
If you’re self employed – as more than 20% of Australians are – a lo doc loan might be your ticket to owning your own home.
Australia has long been referred to as the ‘lucky country.’ We have the sun, sea and surf, and the highest median wealth on the planet, says the 2012 Credit Suisse Global Wealth Report. Australians are certainly doing it for themselves – and much of this wealth has been generated by property.
Twenty per cent of us are also self-employed, seeking financial independence and a much sought-after work life balance. But what happens when that 20 per cent want to buy into property, or even add to a property investment portfolio, yet don’t have their finances up to date? Is this where their envious lifestyle ends? For many, it is thought so.
“Being self employed means that the application process for a home loan isn’t always as simple as just gathering pay slips,” says Greg Mitchell, Homeloans’ general manager – sales. “For many reasons, you may be unable to meet the lending criteria required for a fully verified (or full doc) mortgage, but there are still many options for a mortgage that meets your needs.
“An alternative is to apply for a Lo Doc home loan. These have been specifically designed for self-employed people. And whilst there may be a few additional requirements, it’s not that much harder than applying for a full doc loan.”
Over the years, the lo-doc loan has evolved significantly.
According to the Australian Bureau of Statistics, prior to the GFC the lo-doc loan accounted for a quarter of all mortgages written. However, this was severely stripped back to less than two per cent in the aftermath of the GFC .
“In many ways, the GFC is thought to have contributed to the lo-doc loan’s loss of popularity,” says Mitchell.
“However, with the GFC another year behind us, we are seeing the market beginning to correct itself now, as borrowers, mortgage brokers and lenders become more educated about lo-doc loans and what they can offer. It means there’s renewed interest in lo-doc loans and what they can offer.”
It’s important to note that lo-doc loans can attract higher interest rates and usually need a higher deposit. In addition, options such as cash out refinancing may be tighter and need to be considered, as well as compulsory mortgage requirements such as lenders’ mortgage insurance which on most loans is required if you borrow over 60 per cent LVR (loan to value ratio). There are some exceptions to this, for example the Homeloans MoniPower lo doc, which is available up to 70% LVR without mortgage insurance.
“When assessing a self employed applicant’s eligibility for a home loan, lenders look for consistency of income,” explains Mitchell. “They want to see that the business has been maintaining a level of income that’s suitable to meet their minimum repayment requirements.”
As such, in addition to business tax returns, Business Activity Statements and profit and loss statements, the lender will likely require the most recent two years’ worth of personal tax returns.
“It’s important to speak with someone who understands the full picture of your financial position. At Homeloans we can discuss options with you and provide an understanding of what an applicant needs,” Mitchell adds.
Proven lending practices
Today, paying our mortgage remains the top priority for Australians. House prices in many parts of Australia took a knock with the GFC, but with falling interest rates, this year is showing a new confidence in what has been stagnant market over the past three years.
And with this confidence brings renewed options for borrowers who have previously not fitted the mould. Australia has one of the most proven lending practices in the world and with this comes lo-doc loans, which ensure a mortgage option is available to meet the needs for all Australians.
Self employed? Tips for helping secure a mortgage
If you are self employed and looking for a home loan, there are some key things you can do to prepare:
- Talk to a lender or broker: They will discuss the options available to you
- Be upfront: Tell the lender or broker what’s been going on in the business (e.g. large, one-off expenses that won’t be a recurring expense in subsequent years)
- Be prepared: Have the last two years’ company tax returns, Business Activity Statements and financials (including profit and loss statements), and personal tax returns
- Involve your accountant: Even with the quarterly BAS completed, an accountant can provide other collateral your lender may need
- Give yourself time: All mortgages take time to prepare and submit, and this is easily increased for anyone who is self employed. Give yourself time and stick to it.
i.The Australian Bureau of Statistics (ABS)
ii. JP Morgan