The lowdown on Low Doc loans
Read a very good summary of the history of low doc loans in The Advisor article "Self employed - the allure of the entrepreneur". The piece is written for mortgage brokers but is worth a read for anyone who wants to understand a bit more about the space. I've highlighted some of the key points below...
- The traditional flagship home loan product for the self-employed borrower is the low doc.
- This type of loan was initially pioneered by the non-bank sector back in the 90s and was targeted at businesses that could afford to service a loan.
- In the early days self-employed borrowers would be looking at a 60 per cent LVR and could expect to pay a couple of per cent over the standard variable rate for the privilege of not providing the full set of documents the banks expected.
- The low doc however came of age in the last decade when lenders like RAMS Home Loans brought in a new level of competition in lending.
- Maximum LVRs quickly rose to 80 per cent and then kept going, with some lenders offering low docs as high a 95 per cent. And it wasn't just the maximum loan ratios that loosened up.
- The cost of low docs tumbled at the height of the securitisation boom. Debt was cheap, and low docs were in high demand.
- By the mid 2000s pricing was close to parity with the variable rates the banks were offering for full doc borrowers.
- Inevitably, as low doc lending became so competitive it was abused and it ended up catering for a far broader audience than the self-employed sector it was intended for. The party came to a crashing end when the American housing market imploded. Millions of loans and billions of dollars disintegrated, leaving every financial institution the world over with little appetite - or capacity - to accommodate low doc lending.
- The big four tightened their lending criteria to this market segment, making it harder for self-employed borrowers to obtain finance. In 2009, Westpac, St George and RAMS all tightened their lending policies for self employed borrowers - requiring each low doc application to be supported by at least one year's worth of business activity statements, with the most recent statement no more than three months old at the date of application.
- Self-employed borrowers suffered as a result of these changes.
- Genworth recorded a significant decline in the number of low docs written. In 2009, this market segment accounted for 12 to 15 per cent of the insurer's business - a significant drop on the year before.
A New Beginning:
- While the last few years have been tough for self-employed borrowers and the brokers who service them, the outlook has brightened.
- While the major lenders continue to enforce their tighter lending requirements, there are indications that funding for this sector is starting to open up.
- Earlier this month, two wholesale funders - Adelaide Bank and Advantedge - gave a much needed boost to the self employed sector, with the launch of two new low doc products.
- The funding boost has helped non-bank lenders step back up to the plate and once again target the niche market they dominated 10 years ago.
- Pepper announced earlier this month it would slash 0.5 per cent off its Self Employed Advantage Rate, while Australian First Mortgage launched a Complete Option self-employed lite doc loan.