There’s no denying that the days where money was freely distributed by banks in the form of low doc and no doc loans are well and truly behind us. With the credit crisis in the US forcing Australian banks to conduct a complete overhaul of their own credit policies to ensure they didn’t suffer a similar fate to many of the American majors who went under in 2008, it has become increasingly difficult to secure finance without meeting the new, stricter application guidelines.
Not so long ago when credit was easier to come by, low doc loans were readily used by borrowers who were self employed as it meant they didn’t have to provide full financial accounts and tax returns. Instead, they simply had to self-declare their pre-tax income. The banks trusted that those who were self employed and lived on the transactions conducted through their businesses would only borrow what they were capable of paying back.
In my experience, this system worked remarkably well in Australia and has only been overhauled with new tougher regulations due to the mortgage market meltdown in the US that saw money being thrown at people who simply couldn’t afford to meet the repayments.
The new restrictions now enforced by lenders mean that if you have an existing low doc loan product and you wish to vary or increase it, you can no longer qualify to do so without providing your financial accounts or Business Activity Statements and trading account statements. In other words, it is now virtually impossible to refinance a low doc loan with another low doc loan product.
Additionally, there are new, strict limitations on cash out facilities with low doc loans, the available maximum Loan to Value Ratio has been significantly reduced from the once acceptable 80% to 60% in most instances and the applicable interest rate is higher than that of full doc loan products (sometimes by as much as 1.5%). In fact where the LVR offered is up to 80%, which is still the case with some of the non-conforming lenders in the market, the margin between the low doc and full doc interest rate can be as high as 3%.
Cash out components within a loan product can be critical to investors particularly. Often, they will seek to establish a Line of Credit against the equity in their own home or other properties to use as funding to acquire further investments or as a cashflow buffer to cover repayment shortfalls. However, in the case of new low doc loan criteria, any funds released must be for a clear purpose that can be proven and justified.
Because of the new, tougher restrictions surrounding low doc loan products, the limitations imposed on those all important cash out facilities and of course the current low interest rate environment; now is a great time for investors who currently have a low doc loan to consider converting to a full doc.
By doing so, you will have many more options available when it comes to accessing existing or future equity to build your portfolio and you could potentially secure a more competitive interest rate than that of your low doc loan product.
If you want some advice on how you can convert your loan from low doc to full doc and gain the maximum possible benefit by doing so, please contact us at Metropole Finance. Click here now to arrange an obligation free consultation.
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