Are Low Doc and No Doc Loans Dead?
With the collapse of the world economy and the failure of many of the larger insurance companies, many small business owners and self-employed may be worried that this has rung the death knell on all no doc and low doc mortgages.
The good news is that they are still out there – you just need to know where to look and possibly jump through one or more additional hoops.
Low doc and no doc mortgages are ideal for self-employed and people with variable incomes who are earning enough to service a loan.
These types of loans need very little formal documentation to get approval, but as a result the risk to the lender is greater. This means the interest rates on low doc and no doc loans can be higher than traditional loans to compensate the lender for this risk.
Another result is the increased requirement for you to take out Lenders Mortgage Insurance once you want to borrow over a certain percentage of the value of the property.
This percentage is known as the loan to value ratio (LVR) and generally you are required to take out Lenders Mortgage Insurance if the loan to value ratio is greater than 80% of the current market value of the property for full documentation loans, for low doc the LMI starts when you exceed 60% and for No Doc, the premiums start from the 0% or the first dollar borrowed.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance or LMI, is insurance that protects the lender for the higher risk loan and any foreseeable or potential loss associated with that loan. LMI does not protect you, the borrower. There are one off fees associated with LMI and the lenders pass this cost onto you.
LMI insures the lender against the situation where you default on your loan and they need to repossess and sell your property to repay your loan in full plus costs. If the sale price for your property is less than the amount of your loan, the mortgage insurance covers the difference so the lender is not out of pocket.
LMI does not cover your mortgage payments if you are unable to meet the payments for any reason (that is income and mortgage protection insurance) and has nothing to do with your regular home insurance. LMI is purely to protect the lender. The reason it exists is to allow lenders to responsibly lend money to a larger range of clients.
How has Loan Mortgage Insurance changed since December 2008?
The main changes with LMI that affects small business owners are the changed documentation requirements by Genworth Mortgage Insurance (one of the two main LMI providers in the industry).
In addition to their previous requirements, for all low doc loans they now require:
- Business Activity Statements (BAS) for the past 12 months, as submitted to Australian Taxation Office certified and signed by the broker as true and correct copies of the original.
- Businesses with a declared income of $75,000 or more per annum must provide evidence that they are GST registered for a minimum of 12 months.
QBE, the other major player in the LMI industry, has not adopted these additional documentation requirements but this may change in the future. There are some lenders that offer "in-house LMI" which have also not adopted the additional requirements.
If you are not sure how to find the right Low Doc or No Doc Loan to suit your personal circumstances in these challenging times, talk through your options with a good Mortgage Broker. They will be able to guide you through the changing face of mortgages and help you come up with the right package to meet your needs.
At Kennedy Financial Solutions our friendly, independent, personal approach takes the guesswork out of finding you the best loan package, with the right interest rate and the right terms for your needs. Call us today 1300 859 598.
Are Low Doc and No Doc Loans Dead?
With the collapse of the world economy and the failure of many of the larger insurance companies, many small business owners and self-employed may be worried that this has rung the death knell on all no doc and low doc mortgages.
The good news is that they are still out there – you just need to know where to look and possibly jump through one or more additional hoops.
Low doc and no doc mortgages are ideal for self-employed and people with variable incomes who are earning enough to service a loan.
These types of loans need very little formal documentation to get approval, but as a result the risk to the lender is greater. This means the interest rates on low doc and no doc loans can be higher than traditional loans to compensate the lender for this risk.
Another result is the increased requirement for you to take out Lenders Mortgage Insurance once you want to borrow over a certain percentage of the value of the property.
This percentage is known as the loan to value ratio (LVR) and generally you are required to take out Lenders Mortgage Insurance if the loan to value ratio is greater than 80% of the current market value of the property for full documentation loans, for low doc the LMI starts when you exceed 60% and for No Doc, the premiums start from the 0% or the first dollar borrowed.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance or LMI, is insurance that protects the lender for the higher risk loan and any foreseeable or potential loss associated with that loan. LMI does not protect you, the borrower. There are one off fees associated with LMI and the lenders pass this cost onto you.
LMI insures the lender against the situation where you default on your loan and they need to repossess and sell your property to repay your loan in full plus costs. If the sale price for your property is less than the amount of your loan, the mortgage insurance covers the difference so the lender is not out of pocket.
LMI does not cover your mortgage payments if you are unable to meet the payments for any reason (that is income and mortgage protection insurance) and has nothing to do with your regular home insurance. LMI is purely to protect the lender. The reason it exists is to allow lenders to responsibly lend money to a larger range of clients.
How has Loan Mortgage Insurance changed since December 2008?
The main changes with LMI that affects small business owners are the changed documentation requirements by Genworth Mortgage Insurance (one of the two main LMI providers in the industry).
In addition to their previous requirements, for all low doc loans they now require:
- Business Activity Statements (BAS) for the past 12 months, as submitted to Australian Taxation Office certified and signed by the broker as true and correct copies of the original.
- Businesses with a declared income of $75,000 or more per annum must provide evidence that they are GST registered for a minimum of 12 months.
QBE, the other major player in the LMI industry, has not adopted these additional documentation requirements but this may change in the future. There are some lenders that offer "in-house LMI" which have also not adopted the additional requirements.
If you are not sure how to find the right Low Doc or No Doc Loan to suit your personal circumstances in these challenging times, talk through your options with a good Mortgage Broker. They will be able to guide you through the changing face of mortgages and help you come up with the right package to meet your needs.
At Kennedy Financial Solutions our friendly, independent, personal approach takes the guesswork out of finding you the best loan package, with the right interest rate and the right terms for your needs. Call us today 1300 859 598.