Low doc loans, explained properly

Low doc lending in Australia is nothing like the version people remember from before 2010. Under the National Consumer Credit Protection Act, a lender or broker arranging a regulated consumer loan must make reasonable inquiries into your circumstances and take reasonable steps to verify what you have told them. There is no no-doc consumer lending. What survives is alternative documentation, usually shortened to alt doc, where income is evidenced by something other than tax returns.

The distinction is worth holding onto, because the two ideas carry very different risk. An alt-doc loan is not a lower standard of assessment. It is the same standard applied to a different evidence set.

Full doc

A standard application evidenced by tax returns and notices of assessment, or by payslips where the borrower is salaried.

Alt doc

The same assessment standard applied to a different evidence set: business activity statements, trading account statements or an accountant’s declaration in place of returns.

No doc

Lending with no income verification at all. It does not exist for regulated consumer loans in Australia, whatever a website calls its product.

Self-declaration

Your own signed statement of income. It opens an alt-doc file and is never accepted as the only evidence in one.

Most alt-doc policies ask for a self-declaration of income from you, supported by one or two independent forms of verification. Which combinations are acceptable differs by lender, and that is the single biggest reason two lenders can look at the same borrower and reach different answers.

A common trap sits inside the bank statement method. Assessors do not treat every deposit as income. Transfers between your own accounts, loan drawdowns, refunds and one-off asset sales usually come out first, and a margin is then applied to what remains. Deposits are the starting point, not the answer.

This is the part most often glossed over. Where a loan is wholly or predominantly for business purposes it falls outside the consumer credit rules, and the lender will ask you to sign a business purpose declaration. Where the loan is for personal purposes, including buying or refinancing the home you live in, the consumer rules apply in full.

That declaration is not a formality. Signing one for a loan that is really for personal use is a serious matter, and it removes consumer protections that would otherwise apply, including hardship provisions. If anyone suggests describing a home loan as a business loan to get it through, that is the moment to stop.

Alt doc is built for a specific situation. Outside that situation it is an expensive way to do something simpler.

The last one deserves saying plainly. The declared figure has to be one you can stand behind. Overstating it is not a shortcut. It is a false statement on a credit application, and the consequences sit with you.

1. 01

   Establish the real number

   Work out serviceable income with your accountant before approaching any lender. Not the optimistic figure, the one an accountant will sign their name to.

2. 02

   Pull twelve months of everything

   BAS lodgements, trading account statements, ABN and GST registration details. Twelve months opens more policies than six does.

3. 03

   Clean the trading account

   Dishonours and overdrawn days do real damage in an alt-doc assessment, because the statements are the evidence. Three clean months before applying is worth more than an explanation afterwards.

4. 04

   Check the tax position first

   Most alt-doc lenders ask whether there is a tax debt, and many ask for an integrated client account statement. Disclose it. A balance discovered later in the statements ends the application.

5. 05

   Match the file to a policy, then apply once

   Lenders accept different combinations of evidence. The work is choosing the one whose policy your evidence already satisfies, rather than testing several and collecting enquiries that sit on file for five years.

Alt doc is usually a stage rather than a destination. Once two years of returns are lodged and the income is on paper, the same borrower is often a full-doc proposition at better pricing and a higher ratio ceiling.

• Lodge returns on time from here, every year, without exception.
• Diarise a review for once the second year of returns has been assessed.
• Keep repayment history clean on the alt-doc loan. That conduct is the evidence a prime lender will look at hardest.

A future refinance is never automatic. It depends on lender policy, the valuation and your circumstances at the time. Planning for it is still better than not, because the actions that make it possible are the ones you take in the meantime.

WeL’nd is a credit representative working across a panel of more than forty lenders, and alt-doc policy is one of the places where panel width does real work. Nothing here is credit advice or an offer of credit. Any loan is subject to lender assessment and approval.