BORROWING WITHOUT DOCUMENTATION
Published on May 08, 2015
For the past month, we have been discussing the various types of loans available to ensure that when you need todecide on finance, you can make an informed decision on the best option for your situation and needs.
We've done this because all too often we see people carefully select an investment property to buy and then go and have their finance arranged by whoever, with little or no appreciation of the major and integral role finance plays in their journey of growing a property investment portfolio.
Our five part series explaining all things finance concludes this week with an insight into Low Documentation (Doc) and No Doc loans.
The pros and cons of Low Doc and No Doc loans
10 years ago Low Doc and No Doc loans were at the peak of their popularity in Australia, especially for the self-employed or contractors. As the name suggests these were loans appealing to those who were unable to provide verification of their incomes until after their annual tax return had been filed by their accountant.
In the case of No Doc loans, clients would sign statutory declarations to declare their ability to meet the required loan repayments, and in the case of Low Doc loans a minimum proof of income, such as an accountant’s letter, was all that was required.
These loans offered convenience and gave people who had not yet had their tax returns filed the opportunity to take advantage of buying opportunities and borrow the money required, however, the level one could borrow was restricted.
Loan to value ratios (LVR)
A Full Doc loan on residential property usually allows for an 80% LVR, however, where mortgage insurance is taken up borrowings can be up to 95% of the value of the asset being acquired.
Mortgage insurance was not offered with Low Doc and No Doc loans and in the case of the latter the LVR was restricted to between 60% and 70%. This means a borrower would have to contribute a significantly larger deposit from either savings or equity in another asset to complete a purchase.
Providing less documentation increases the perceived risk associated with an applicant, therefore lenders would charge a higher rate of interest and/or additional fees.
In normal circumstances borrowers were better off providing proof of income, assets and liabilities, credit cards, detail of existing debt etc and entering into a Full Doc loan where they would be given a cheaper rate of interest and a higher LVR - meaning they could secure an asset with very little deposit.
That said, there were many instances where a Low Doc or No Doc loan was the only way people could take advantage of opportunities quickly and so the higher interest rate charged to them was more than offset by avoiding the opportunity cost of missing out on an investment while they waited to have their tax returns prepared.
I have personally benefitted from Low Doc loans on more than one occasion, which after two years of consistently making my repayments on time, I was able to revert to the discounted variable loan rate offered to those who had Full Doc loans.
Of course the problem was that when there was an opportunity for people to get their hands on credit so readily a number of them did so by fraudulently manipulating the system, falsified incomes to take on debt levels that were irresponsible and unmanageable. Whoops!
GFC and NCCP
When the global financial crisis (GFC) hit in 2008 everything changed. Low Doc and No Doc loans disappeared from the Australian banking landscape completely and lending criteria on Full Doc loans was tightened.
In 2012 the federal parliament passed the National Consumer Credit Protection Act (NCCP) introducing regulations including proof of income being mandatory prior to any residential property loans being offered to individuals.
Today if you are looking to borrow money to buy a home or invest in a residential investment property you will first have to provide proof of income. As such, No Doc and Low Doc loans are irrelevant.
If you are investing into commercial property or if your SMSF is looking to invest into residential property and its trustee is a company (i.e. a corporate trustee), these loans may still be useful. The reason for this is that the NCCP Act is there to protect individual borrowers who are borrowing to buy residential property only.
So while in certain instances you may be eligible for a Low Doc or a No Doc loan the important question is are these your best option?
When it comes to any decision around your investments and your financial security it’s vital to have the right knowledge and always act in a responsible manner. There are too many cowboys out there and, as you'd already know, they are not the ones who contribute to the lives of others while working smart to successfully realise their own dreams in life.
Debt is like a scalpel
I've said it before and I am going to say it again, and again! Debt is like a scalpel, which in the hands of a skilled surgeon can save a life. That same scalpel in the hands of crazed man will potentially be an instrument of death.
It’s only the right and responsible use of the right kind of debt that we would ever promote. Why? Because it can massively propel you closer to your financial goals. In fact, with few exceptions, ‘other people’s money’ (or productive debt) is the very vehicle that the wealthy from all walks of life have used to achieve their financial success.
Conversely, it’s the irresponsible misuse of the wrong kind of (i.e. horrible) debt that keeps about 95% of the population financially shipwrecked at the end of their working lives; and often during as well.
How to choose
MRD not only offer a full spectrum of services relating to property acquisition, investment options, superannuation and insurance but we have a self imposed duty of care around all that we do. Our goal is to partner with you over the long term - through good times and bad - and see you keep going and ultimately win!
After these five articles on finance and loans you may be asking “how do I know which loan to choose?”.
Speaking with MRD’s finance strategists is a great starting point. We'll assist you to discover which loan is most appropriate for your individual circumstances, and if we can help we'll also guide you through the paperwork and application requirements.
Pick up the phone and call now on 1300 883 854 or reply to this email with your preferred time and best contact phone number. We'll give you a call, discuss your individual needs and even look at your current loan types and structures to determine if we can add value to your set up and save you money on repayments.
To fast track our support for you go ahead and complete (what we refer to as) a MRD ‘My Starting Point’ form now and we'll get cracking on looking at options and possibilities for you >>>here.
Partnering with you for your investment success.