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Low doc loans 'thriving' again: Canstar

Low doc loans 'thriving' again: Canstar

Low doc home loans all but dried up after the global financial crisis but Canstar says the sector is "thriving" again.

Canstar research manager Mitchell Watson says low doc borrowers face higher interest rates and fees but the loans bridge the gap between proof of income and home ownership for the self-employed and contract workers.

"While there is an interest rate margin between a standard and a low doc home loan, it's a margin of only around 50 basis points, which is not excessive.

"The demand is still there and the sector is thriving once again."

An Australian Securities and Investments Commission review of low doc loans last year found lenders had tightened their lending practices since the 2010 introduction of the responsible lending laws.

Introduced in the Australian market in the late 1990s, low doc loans were initially targeted at the self-employed and others who lacked an income stream that could be readily verified by payslips.

Their reach then widened and some lenders simply relied on a borrower stating they could meet their repayments.

"This led, in some cases, to borrowers not being able to pay back the loan, or only being able to do so by selling their home," ASIC says.

The market grew rapidly to account for about 10 per cent of newly approved housing loans before the GFC and the financial services regulator's crackdown led to a significant decline in the number of low doc loans.

Since 2010's responsible lending laws came in, low doc loans have declined from a 6.4 per cent share of new housing loan approvals to 0.7 per cent by early 2015.

That has fallen further to 0.4 per cent of new loans - worth $431 million - in the June 2015 quarter, the latest Australian Prudential Regulation Authority figures show.

ASIC says lenders are now providing low doc loans to a narrower range of borrowers, specifically the self-employed or those who do not have a readily verifiable income, and are obtaining additional information such as business bank account statements and/or letters from accountants.

Financial comparison website Canstar notes that low doc loans can be used for more than buying a home, such as consolidating debt, a share purchase of a property asset or paying out a tax debt.

HOW MUCH MORE A LOW DOC LOAN COSTS VERSUS FULL DOC LOAN:

RATES ON AVERAGE VARIABLE LOAN

* 0.53 percentage points more (5.43 pct versus 4.90 pct)

* $109 a month more ($2,135 versus $2,026)

* $1,308 more per annum ($25,620 versus $24,312)

RATES ON THREE-YEAR FIXED LOAN

* 0.41 percentage points more (4.94 pct versus 4.53 pct)

* $83 a month more ($2,034 versus $1,951)

* $996 more per annum ($24,408 versus $23,412)

AVERAGE FEES

* Upfront $337 extra ($809 versus $472)

* Ongoing $13 extra ($132 versus $119)

* Discharge $34 extra ($297 versus $263)

Notes: Based on $350,000 25-year home loan; 60 pct loan-to-valuation ratio for variable low doc loan, 80 pct LVR for standard variable loan.

Factbox source: Canstar's first rating of low doc loans since GFC: 59 loans from 18 lenders in 2015 versus 109 from 30 lenders in 2009.