Wednesday, July 30, 2008

Low-Doc Loans

Although some banks offer Lo Doc loans to PAYG earners, they are generally designed for self-employed customers who are not able to produce documents to substantiate their income. If you take out a low documentation loan, you won't need to give your lender as many documents to prove your income. You still have to apply in writing and sign your loan agreement, but you genrally are not be required to produce things like pay slips and tax returns. With most Low- Doc loans you are simply asked to state your income in a declaration know as “self-verification”.

Generally, any bank or other type of lender that offers these products will want to see proof of your assets and liabilities. In most cases they will attempt to make some comparison between the amount of income you are declaring and your asset position. If you are stating a very high income to service an expensive loan, a potential lender will expect to see a reasonably good net-asset position.

It's vital that you understand what you're getting into and not use a Low-Doc product to obtain a loan you simply otherwise couldn’t afford.

While some banks offer lo doc loans at rates equal to the prime lending rate (the rate offered to customers who fully verify their income), others charge a premium of around a half to one per cent higher. We are all familiar with the fact that banks have been increasing interest rates in advance of that levied by the Reserve Bank. Recently however, lenders have been moving the rate charged for Low-Doc products even higher. There are customers of several major banks who took out Low-Doc loans at near prime rates that are now being charged 10.50 per cent.

In wake of the recent wholesale funding difficulties (usually referred to as “the US sub-prime crisis) many lenders have withdrawn from the Low doc market. According to Cannex there were 180 Low-Doc loans being affered by46 lenders in January this year. This has shrunk to 153 loans from 38 lenders. Those that have exited include Bluestone, Virgin Money and big banks like HSBC and Macquarie.

The good news? Low-doc products made up 1 per cent of all loans in Australia last year, well below the 13 per cent that represent US sub-prime loans in that market.

(reference: 30 July 2008;

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