If you’re a small business owner and thinking about getting into the property market this year, there are some things you need to know before jumping into a home loan.
It could save you thousands of dollars as well as peace of mind knowing that you’ve researched the home loan market and compared deals to find a loan that suits your needs.
It could also save you a lot of time and disappointment too, as you’ll be prepared with what to expect from a low doc home loan and the right information at your fingertips.
Prepare to pay more than a standard home loan.
Low doc home loans are generally more expensive than full doc loans. The reason is because lenders see low doc loans as higher risk of borrowers not being able to service the loan.
Low doc loans are just that – low documentation, which means borrowers don’t have all of the sufficient documents needed to complete a full doc home loan application such as pay slips, tax returns or inconsistent cash flow or income. Full doc home loans require proof of income in the forms mentioned above, so if you can’t provide these documents you will have to apply for a low or no doc home loan.
Features and services of low doc home loans are generally similar to full doc home loans where you can find some with redraw facility and internet access. The main difference is the interest rates and fees that lenders charge.
For instance, the average variable low doc interest rate in RateCity’s database (excluding introductory rates) is currently 6.53 percent, while the average full doc variable rate is 5.91 percent – 62 basis points lower than low doc! What’s more is that variable rates start from 5.7 percent for low doc and much lower for full doc, at 5.17 percent.
While you can expect to pay more for low doc loans compared to full doc, there is a significant difference between the lowest and highest rates on offer so it’s worth shopping around for a good value deal. In fact, the difference between the lowest and highest low doc rates in RateCity’s database is 257 basis points.
For a $300,000 home loan, that difference is worth a staggering $621 per month or over $223,000 over a 30-year loan term.
Expect to save a deposit of 40% of the property value.
Unlike full doc loans, low doc loans generally require a bigger deposit. Most full doc loans allow a minimum deposit of 5 percent of the property value (or maximum loan-to-value ratio (LVR) of 95 percent). Most low doc loans, however, need a minimum deposit of 60-80 percent (maximum LVR of 60-80 percent).
What this means in dollar terms is, if you are looking at a property worth $400,000, you will need a deposit of $80,000 saved for an 80 percent LVR, or $160,000 for a 60 percent LVR. This doesn’t include any upfront fees, which should set you back about $700.
There are a few loans that offer up to 85 percent LVR (15 percent deposit) but these loans generally come with much higher rates – up to 8.76 percent. So it’s worth taking the time to save for a bigger deposit otherwise you could end up paying hundreds of thousands more over the long-term.
Shop around and haggle for a good deal!
As mentioned above, there is some serious money to be saved by shopping around. Firstly, compare deals using financial comparison websites like RateCity and check out the Low Doc Home Loan page.
Once you’ve found the loan or lender you want, call the lender or go to a branch and ask for a discount. The worst they can say is ‘no’ and if you can find a cheaper deal take your business elsewhere and it’s their loss. But even a small discount of 5 basis points could be worth over $4000 in your pocket over 30 years.
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