Low Doc Home Loan/Mortgage for Debt Consolidation?
The credit turmoil has lead to some radical changes in the way home loan lenders assess home loan applications. Lo doc loans have come under greater scutiny, but what are they and what are they good for?
Low Doc (short for Low Document) home loans are targeted at contractors and the self-employed, who often lack current tax returns and financial records. Traditionally it has been more difficult for the self employed to obtain loans because banks had a preference for borrowers on guaranteed (ie PAYE) incomes and yes they are still available.
A Low Doc Home Loan will help borrowers with irregular cash flow or who may not have current tax returns and financial statements, providing they have sufficient equity in an existing property or other assets. In some case’s wage earners can also access low doc home loans.
My big tip for any one considering a low doc home loan for debt consolidation, is to make sure you have kept all their credit cards, store accounts and current home loan in order for atleast the last six months. It will be difficult for your mortgage broker to obtain finance for you if you have been erratic with your payments or flippant with your credit rating.
Low Document loans can attract a higher rate of interest than other types of loans because lenders perceive the risk involved to be greater.
Because the employment situation in Australia is changing, bank and non-bank lenders have had to become more flexible in their approach to lending and so Low Doc loans are becoming more common.
Features of Low Doc Loans
The Low Doc loan is usually just a standard fixed or variable rate loan, but with different credit criteria i.e. low documentation.
Since full documentation is not required the risk to the lender is higher and this is reflected in the interest rate and maximum loan-to-valuation ratio (LVR) of 65 – 80%. Interest rates are often 0.5% to 1% higher than standard loans depending on risk but competition is bringing rates down and the rate is often reduced once you have established a good track record of repayments. Still, Lenders Mortgage Insurance is not normally required on loans under 80% LVR.
Other useful features can include offset accounts, redraw facility, direct salary crediting, portability and repayment options depending on the lender and type of loan.
Benefits of Low Doc Loans
Specifically designed for self-employed and contactors with good credit records.
Low documentation requirement (This does not mean no documentation!)
Feature rich depending on type of loan selected
Tips and strategies
Shop around because interest rates and LVR can vary significantly between lenders
Avoid loans with monthly account fees
Making weekly or fortnightly repayments pays your loan off faster than monthly payments because you are making 1 or 2 extra repayments per year
When interest rates drop retain current repayment levels
Have your personal income paid into your loan account to reduce interest and use the interest free period on a credit card for purchases before paying the credit card bill from the loan account
Put lump sum payments like tax refunds into your loan account. If required later, use the redraw facility.
Example Rates and Fees
Variable Rate Home Loan (June 2008):
Monthly fee $10
Annual fee NIL
Redraw fee $50
Extra Payment fee NIL
Fixing fee NIL
Low Rate 7.97% std. variable
*Based on $250,000 Loan over 25 years.
See your finance or mortgage broker for more details.