Low documentation or "low-doc" loans require less documented evidence of income, assets, and liabilities than a traditional loan product. Borrowers are still required to apply in writing and sign a loan agreement, but will not be required to produce pay-slips, tax returns, or any other form of proof of income.

Lenders MUST verify affordability, despite consumer protection provisions such as: s27.1 of the Bankers Code, Lenders continue to approve SUB PRIME LOANS.  

In the interests of Consumer Protection, we have listed THE DANGERS inherent in LOW DOC MORTGAGE LOANS

Because low-doc loans do not require income verification, these loans are an attractive financing option for borrowers who are self-employed, independently contracted, or work as investors. Yet most people in Australia who have signed up for these loans are pensioners, low income families who are neither self-employed, nor are they investors.

The loans are set for 30 years, yet implode under the weight of the cost of the loans at around the average 5 year mark.  Low Docs are the most expensive loan in Australia.  If you are enticed into using your own home as EQUITY and security for the bank to enable you to borrow money.....you will most likely LOSE your own home and the investment home within five years as the fees charges and high interest costs will eat into the equity.  WHY?

Most people realise after 4 years - they owe more than the debt they started with, meaning the loan is unsustainable and can never be paid off.   Consumers are told by banks that in 5 years you can convert to P & I loan but that rarely happens as by then the loan is in default.

Low documentation loans require applicants to go through a process of income verification called "self verification" in which the applicant simply states their income.  

Marketing will tell you: "Because the requirements are simple, low doc loans can benefit any borrower who would not qualify for a standard loan."  This is patently misleading. There  are few benefits to this loan due to the interest only nature of the loan, it can never be paid off unless you expect a  windfall shortly to be the rescuer.  These loans are DEBT on STEROIDS.

Low doc loans are popular with lenders and brokers to sell potential to borrowers due to the huge commission structures and bonuses.  There is a massive conflict of interest in selling these products, hence the high cost of servicing the loan.

If a seller of the loan suggests you use the funds to buy an investment properties, ask for a FULL DOC LOAN and hand over 30% deposit.  If you are unable to do this do not agree to continue discussion re these loans as there are so many traps.....................just ask our BFCSA members.

DO NOT be tempted to refinance your existing mortgage.   Marketing suggests:  "there is no income verification to qualify."   These are typical "entrapment" statements which should immediately alert consumers to a DANGER that in taking out the loan they may well lose their own home within 5 years..

Other marketing suggests: "if you do not want to spend your time filling out a heavy load of paperwork or provide sufficient documentation for a traditional loan, you are better with a Low Doc."  This is false as the paperwork to apply is almost identical.

Loans are approved by a computer and from then on whatever you have signed up for is YOUR FAULT.  Lenders take no responsibility for the downside and you are on your own.  You WILL LOSE YOUR HOME.   Before you sign on the dotted line consider the downsides:

BIG DOWNSIDES TO LOW DOC LOANS    Borrowers might have to:

  • Pay a much higher interest rate than those with standard loans because the Lender does not ask for sufficient financial documentation.
  • Lenders often lend you extra monies to PAY PAYMENTS with bank's money - meaning interest on further debt and forced refinancing.
  • After two years the debt starts spiraling out of control and the borrower is trapped.
  • Lenders encourage CREDIT CARDS to use to pay payments - and further costs: paying a home repayment plan on DEBT STEROIDS
  • Lenders like to promote these loans as they are far more "profitable" for banks and the loans have in built plan of repossession of security in five years
  • Pay additional, higher fees and charges, default fees. These charges usually include a 'risk fee' so that the lender has some security in loaning the money.
  • The RISK FEE costs YOU around $8000 per loan - capitalised into the loan - to PROTECT THE BANK not you.
  • The RISK FEE is actually the old Loan Mortgage Insurance with Banks taking the "risk."  But there is no risk.................for them.
  • The RISK FEE permits banks to lend up to 100% LVR.
  • If you borrow more than $500,000 you are not warned in advance that in a case of default, The Banking Ombudsman cannot assist you.  Banks do not warn you of this situation....you are on your own.
  • Unless you have a very big deposit do not enter into this chamber of horrors............................its risky SUB PRIME LENDING at its worst.
  • If you sign a low doc loan for a short amount of time that will require refinancing when the loan term expires, then the intended but not explained additional costs will be accrued at that time. Refinancing is ULTRA COSTLY and entrapment of the worst kind.
  • Pay mortgage insurance (often required with a low-doc loan over 80% LVR) yet now taken on by banks as a RISK FEE.
  • Lenders typically add additional information to your LOAN APPLICATION FORM ("LAF") after you signed and without your knowledge or consent.  The income is "adjusted" by a service calculator......so make sure you write your true income on the LAF, fill in the form yourself and demand a copy the moment you sign, or tell the agent or banker: "I will fill in details myself and drop back to you later today and TAKE YOUR OWN COPY to avoid fraud which is rife in these products.
  • The LAF is NOT A 3 PAGE document - its an 11 page document and very important you demand a copy of what is being faxed to the bank and then before you accept the money demand a copy of the SERVICE CALCULATOR FORM  - what we call the "fudging income machine."  If Lender refuses to provide the copy explain you no longer require the loan and report the matter to the Police.....that you believe your file has been tampered with by internal Lender staff..

 

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Some lenders, who specialize in low documentation loans, aggressively market this loan type. In some cases, the advertisements target people with poor credit histories and low income self-employed workers. The lenders know that these applicants find themselves in a weak position to negotiate because they are financially considered 'risky' or 'higher risk' than traditional applicants.

Lenders and Agents typically insist on filling out the forms for you (attempting to beef up their income) by using a Lender created compulsory SERVICE CALCULATOR, AND THIS WILL create problems for BORROWERS at a later date. Repayment could be impossible.  Remember, Lenders want to grab your home - your only asset and regulators say Buyer Beware....ASIC will not rescue you and will never ever prosecute the Lenders for fraud.  85% of these loans are sold by the Major Banks.  See the latest Senate Inquiry into ASIC 2014.

Lenders base the approval of the borrower's loan on their own ability to recover costs by selling your home and any other property the borrower has placed on the line as security. Borrowers should be wary of lenders. They are not your friends.

Lenders approve the borrower's loan, but are confident that the borrower will not be able to make payments for more than 3 years and then a refiannce insures any equity is therefore belonging to the bank. To combat this, borrowers need to determine for themselves whether or not they will be able to afford the repayments.

The lender should have no influence over your decision to afford the loan form INCOME.  Do not assess your own ability to pay by using BUFFER MONIES or LINES OF CREDIT or CREDIT CARDS offered by Bankers to say "this loan is affordable!"

Ask yourself: "is this a comfortable payment to make form my current income and likely to be sustained in a secure job for next 30 years?"  Then: "will my super cover the capital owing.............?"

Low doc loans may seem to suit the needs of the borrower, but the borrower must weigh in the MASSIVE extra costs accrued.   In some situations, a borrower can receive a lower interest rate on their loan but find the deafualts in rough patches can send the interest rate to 14% in the fine print.  

FULL DOCs with slightly higher interest rates are far better to save more money over the lifetime of the loan and to pay Principle and Interest.

Borrowers should also be aware that they would be required to pay for mortgage insurance. In the case of a low-doc loan.

Loan Mortgage Insurance is a scam and designed to protect the lender, not the borrower.  Yet the Lender charges you for the POLICY and never ever shows the Policy to you.    Average cost is $8000.     In the event that the borrower is forced to sell their home, they might face losing everything they invested in the property.

Even worse, some borrowers might still owe money after the sale, if the sale price does not cover the amount borrowed.  Many victims of Low Docs have been sent into bankruptcy. At the five year mark, all of the above is obvious but there is no escape hatch.

If you are a first home buyer - you will lose the home in five years BUT you will also have bad credit rating and you have paid $300 per week more than as if you had paid rent.  You are better off renting than the Low Doc Nightmare Trip.  Save for 30% deposit first and then borrow and yes markets do go down in price when property  bubbles burst.

Finally, borrowers should be aware that some low doc loan lenders will offer to reduce the interest rate on a low doc loan after the borrower has proven they can make payments on time.     Usually, the lender will suggest that the borrower pays their mortgage payments on time for a minimum of two years and the rate oif interest will be reconsidered.   This is a furphy - do not fall for Banker Tricks. 

Anyone attempting to apply for a low doc loan because they have not declared their full income to the Australian Taxation Office should never apply for a low-doc loan. These people are at risk of being caught and paying hefty penalties because of their claims.

Best practice is stay away from these LOW DOCS, which are in effect the LIAR LOANS as suffered by Americans during the GFC crisis. Sub Prime lending should be outlawed.  Bankers are responsible for ensuring the correct affordability of the loan and for making sure the income has been verified.  

If the Bank does not call you to verify income the loan you have signed for is a A TOXIC MORTGAGE SCAM.  It means the bank is not adhering to S 27.1 of the Bankers Code.

Tell them you believe the loan is toxic and do not accept the settlement monies - report the matter and name of the LENDER to the Australian Securities and Investment Commission.

As a community of decent people we can collectively stamp out these insidious and fraudulent  lender products in our financial system.  This email address is being protected from spambots. You need JavaScript enabled to view it.