Low-doc loans are home loans designed for self-employed borrowers who may not have the traditional financial documentation required for standard loans. These borrowers often have reliable incomes but lack payslips or regular tax returns, making it harder to prove their earnings in the traditional way.
Instead of providing full financial statements, applicants for low-doc loans typically submit alternative evidence of income, such as business activity statements (BAS), bank statements and an accountant’s declaration. Lenders use these documents to assess the applicant’s ability to repay the loan.
Low-doc loans usually come with stricter lending conditions than standard loans. Borrowers may need to provide a larger deposit, often at least 20% of the property’s value. Interest rates can also be higher to reflect the increased risk from the lender’s perspective.
When would you consider a low-doc loan?
A low-doc loan can be a useful option for self-employed borrowers who have a strong ability to repay a loan but lack the traditional documentation required for a standard home loan. However, because low-doc loans often come with higher interest rates and fees, they should only be considered when other financing options are unavailable.
Here are some common scenarios where a low-doc loan might be suitable:
- Recently self-employed – Many lenders require at least two years of tax returns to assess self-employed income. If you have a solid income but haven’t been in business long enough to meet these requirements, a low-doc loan could be an option.
- Irregular income – Some self-employed professionals and business owners have fluctuating incomes that don’t fit the standard assessment criteria. If their bank statements or business activity statements (BAS) show consistent earnings over time, a low-doc loan could help them secure finance.
- Tax-minimisation strategies – Many business owners use legal tax strategies to reduce their taxable income, which can make it difficult to meet traditional lending criteria. A low-doc loan allows lenders to assess their true income using alternative documentation.
- Property investment opportunities – If a self-employed person wants to seize an investment opportunity but doesn’t have up-to-date financials, a low-doc loan might enable them to act quickly.
While low-doc loans provide flexibility, they should be used only when necessary, because they often have stricter lending conditions, higher interest rates and larger deposit requirements. Before choosing a low-doc loan, it’s important to explore other options first.
How much of a deposit do you need for a low-doc loan?
Low-doc loans generally require a larger deposit than standard home loans. While a full-doc borrower might be able to secure a home loan with as little as a 5% deposit, low-doc borrowers typically need at least 20%. In some cases, lenders may require a deposit of 30% or more, depending on the borrower’s financial position and the lender’s risk appetite.
The reason for the higher deposit requirement is that low-doc loans carry more risk for lenders. Without traditional financial documentation such as tax returns and payslips, lenders rely on alternative evidence like business activity statements (BAS), bank statements and accountant declarations. To offset this risk, they require borrowers to contribute more upfront.
There are some exceptions where borrowers may be able to access a low-doc loan with a smaller deposit, but this usually comes with stricter lending conditions. For example, lenders may charge higher interest rates, require lenders mortgage insurance (LMI) or limit the loan amount.
For self-employed clients, the key to securing a low-doc loan with a reasonable deposit requirement is to have strong alternative documentation, a good credit history and a solid financial position. Some lenders are more flexible than others, so it’s important to explore different options.
What is the minimum credit score required for a low-doc loan?
Low-doc loans don’t have a universal minimum credit score requirement. Instead, lenders assess applications based on their own risk criteria, which include credit scores but also other factors such as income verification, deposit size and overall financial position.
Credit scores in Australia vary depending on the credit reporting bureau:
- Equifax – Scores range from 0 to 1,200. A ‘good’ score is generally 661 or higher.
- Experian – Scores range from 0 to 1,000, with 625 or higher considered ‘good’.
- Illion – Scores range from 0 to 1,000; a ‘good’ score typically starts at 500.
For a standard home loan, most lenders prefer a credit score in the ‘good’ range or higher. With low-doc loans, the requirements are often more flexible, but a borrower with a poor credit score may still struggle to get approved or may face higher interest rates and stricter lending conditions.
Lenders assess risk on a case-by-case basis. A strong deposit, solid alternative income documentation and a history of meeting financial commitments can help offset a lower credit score. Some non-bank lenders specialise in working with self-employed borrowers who have lower credit scores, but these loans often come with higher fees and interest rates.
Five ways to increase your credit score
A strong credit score improves your chances of securing finance, whether it’s a standard home loan or a low-doc loan. For self-employed borrowers, a higher credit score can mean better loan options, lower interest rates and fewer restrictions. Here are five ways you can improve your credit scores:
- Pay bills and debts on time. Payment history is one of the biggest factors in a credit score. Late payments on loans, credit cards or utility bills can harm a credit score, while consistent on-time payments improve it. Setting up direct debits or reminders can help avoid missing due dates.
- Reduce credit card balances. High credit card utilisation – using a large percentage of the available credit limit – can negatively affect a credit score. Clients should aim to keep their balances low relative to their limits, ideally below 30% of the total credit available.
- Limit new credit applications. Every time someone applies for a loan or credit card, it generates a credit inquiry, which can temporarily lower their score. If someone applies for multiple credit products in a short period, lenders may see them as a higher risk.
- Check credit reports for errors. Mistakes in a credit report, such as incorrect personal details or unrecognised credit inquiries, can unfairly lower a score. These kinds of mistakes are more common than you may think. Consumers can request a free credit report from Equifax, Experian or Illion every three months and dispute any inaccuracies.
- Consider closing unused old credit accounts. While a longer credit history can improve a score, there are cases where closing old, unused credit accounts can actually benefit a credit score. This is especially true if those accounts have high credit limits but are not being used, as it could help improve the credit utilisation ratio.
Reach out to your Loan Market broker for more advice around low-doc loans. They can answer any questions you might have, crunch the numbers for you and and help determine the right solution for your situation.
