Having an irregular cash flow doesn’t mean you can’t apply for a fixed rate low doc home loan.
A fixed rate low doc home loan is designed for people who have trouble passing the lending criteria of big banks and other standard mortgage providers. These loans do not require as much proof of income, which makes them ideal for people who own small businesses or with jobs which don’t provide them with proof of a regular income.
Applying for these loans only requires simplified credit documentation, making the criteria for approval far more flexible than for standard mortgages. In this guide, we look into how low doc home loans work and how you can benefit from one of these loans.
Fixed Rate Low Doc Home Loans
What is a fixed rate low doc home loan?
Fixed rate low doc home loans provide flexible financing for people with fluctuating incomes. Most Aussies have no problem showing proof of income, as they can produce payslips, tax returns and bank statements that show their steady source of monthly or fortnightly income.
However, self-employed individuals or owners of small businesses have a much harder time showing a steady source of income, as they often do not have regular earnings. Such people require flexible lending criteria where little documentation is required for mortgage approval. You’ll need to employ the services of an accountant to be able to produce the relevant documents.
There are lenders who cater for such customers, offering fixed rate low doc home loans without proof of regular income, tax return documents or company financial reports.
How do these home loans work?
A fixed rate low doc home loan is a regular home loan with a locked interest rate for a set period of time, but one that requires simplified credit documentation. Unlike other standard home loans, fixed rate low doc home loans do not require proof of regular income and other documents such as tax returns and a history of savings. In most cases, business activity statements (BAS) for the past 12 months or a signed income declaration will be enough to get you approval for the mortgage.
However, you will be required to have a good credit rating, so your credit history will be looked into to ensure you have a good borrowing history. Lenders may also require you to put up a 20% upfront deposit as security. Fixed rate low doc home loans are generally an option for freelancers, contractors, small business owners and other people with fluctuating income.
How to compare fixed rate low doc mortgages
- Required documentation. Those applying for a low doc home loan may want the requirements for approval to be as flexible as possible. Different lenders will ask for varying amounts of financial information, so it helps to shop around to find out exactly what will be required and if you can provide it. Most low doc mortgage lenders will require business activity statements for the past year or so, past tax return documents to prove that you can afford the loan repayments and loan statements for the past six months.
- Mortgage terms. Choosing a low doc loan with favorable terms and conditions can save you money. For instance, some low doc mortgage providers will allow you to finance up to 80% of the mortgage amount or to increase your loan amount after a certain period. Choose a fixed rate low doc home loan with favorable terms, including a loan term and repayment frequency that suits you.
- Loan features. The best fixed rate low doc home loan will depend on what features best suit you. For instance, you may opt to get a low doc mortgage that allows you to make additional payments or that offers a redraw facility among other features. Choosing a mortgage facility with better features that suit your needs can make it easier to manage the loan.
- Interest rates. Like with all other loans, interest rates greatly determine the final cost of your fixed rate low doc home loan. Even a small difference in interest rates between mortgages could translate into thousands of dollars in savings over the course of a 25 or 30 year loan term.
Pros and cons of fixed rate low doc home loans
- Simplified credit requirements. With fixed rate low doc home loans, you can access credit without formal proof of income or savings as is required with other standard loans. These flexible lending requirements make such loans ideal for people without regular employment such as freelancers, contractors and investors.
- Fixed rates. Fixing the rate on your mortgage gives you the certainty that your loan repayments will not fluctuate over the set period, making paying it off more secure and predictable.
- Loan features. A fixed rate low doc home loan may not have all the same features as a standard mortgage, but it can still offer features that you can utilise. For instance, you may be allowed to redraw your payments or make additional repayments depending on the mortgage you choose.
- Higher loan costs. Fixed rate low doc home loan may sometimes have higher interest rates than other full documentation loans. You can also expect to pay Lender’s Mortgage Insurance (LMI) even if you have a 20% deposit, as low doc home loans tend to attract LMI for loans with a Loan-To-Value Ratio of 60% or more, rather than the usual 80%.
- Less flexibility. Fixed rate home loans generally come with less features than a regular variable rate home loan. This means 100% offset accounts and the ability to make unlimited additional repayments are rarer or unavailable in many cases.
- If rates drop you could be stuck paying more. A fixed rate home loan locks in a rate for an agreed period of time. If rates drop during this fixed term, you could be stuck paying more than others.
Things to avoid about fixed rate low doc home loan
Getting a mortgage with minimal document requirements can be one way for you to get your home, but there are also some possible pitfalls to watch out for. As with all fixed rate loans, you are protected from rising interest rates, but you also stand to lose out should mortgage rates drastically go down.
You may also be confronted with high exit fees should you choose to move to another loan before the fixed rate on your mortgage ends. For this reason, you could be better off opting for a variable rate mortgage if you intend to move houses or refinance soon after getting your mortgage.
It is also important to compare different fixed rate low doc home loans to ensure you get a good interest rate, as a high rate would translate into a high cost mortgage that you might struggle to repay.
Frequently asked questions
Are there restrictions on fixed rate low doc home loans?
There may be limitations as to how much you can borrow and also restrictions on buying property in high risk areas.
Can I move to a full doc loan later?
Yes. Most lenders allow you to move to a full doc home loan after making consistent repayments on your low doc loan for a specified period and after providing current tax returns proving that you have the income to pay off your mortgage.