If you’re a strong borrower, but not quite fitting what a bank wants then it may be worthwhile considering a “Lo Doc” or “Alt Doc” Loan. These loans are not just for people with credit impairments (bad creditor history), but for strong borrowers – especially self-employed clients – who are finding it tough to satisfy the banks.
What is a Lo Doc or Alt Doc Loan?
A Lo Doc Loan is a type of loan offered by non-bank lenders when a self-employed borrower is not meeting a bank’s strict approval criteria. Usually this criteria relates to proving income via financial statements and tax returns.
They are also known as “Alt Doc” because they offer alternative methods to a self-employed borrower to demonstrate their income to the lender. Sometimes the name “Specialist” loans is also used to signal that the lender is happy to consider clients with credit impairments, whether self-employed or PAYG.
Some big banks can offer Lo Doc solutions, but this is more for commercial loans, not for home loans.
When should I use a Lo Doc / Alt Doc Loan?
Alt Doc Loans have a range of applications:
Timing: The classic case is that you have found a property opportunity that you want to jump at but do not yet have your financial statements or tax returns up to date for the current year.
Complexity: You may have a very complex structure that is difficult to work through and present to the bank for approval. For example, the level of work required may be worth it for a $5,000,000 loan but not for the $500,000 loan you need now.
High growth businesses: Your business may be growing extremely quickly, and, even if your financial statements are up to date, they do not reflect your current rate of earnings. Waiting for your next set of financial statements will keep you out of the market for too long.
One-off impacts: Alternatively, you may be having an “off” year or going through a difficult patch, despite the fundamentals of your business remaining the same. You are confident you will recover but would like to borrow now.
Bad credit history: You previously had run-ins with the bank or other lenders which have impaired your credit file. You have now re-established yourself and want to borrow.
Other unusual circumstances: Sometimes business and life are “a little tricky”, and this is when Alt Doc Loans are suitable as well.
What are the documents required for Alt Doc Loans?
Alt Doc Loans usually offer three forms of alternative income verification:
- Accountants Letter – this is a fixed template provided by the lender, which declares your income
- Business Activity Statements (BAS) – your income will be calculated looking at total sales, expenses and salaries paid noted in your BAS
- Bank statements – The debits and credits will be evaluated to see if it in line with your declared income
As a borrower, you will also have to self-declare your income to the lender and test if serviceability passes.
What are the advantages and disadvantages of each type of income verification method?
Choice is offered because not every business owner can verify their income in the same way.
The most common pros and cons are set out below:
| Advantages | Disadvantages | |
|---|---|---|
| Accountants Letter |
|
|
| Business Activity Statements (BAS) |
|
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| Bank statements |
|
|
So from the above table, usually the Accountant Letter or BAS method are preferred when pursuing an Alt Doc Loan.
Note: some lenders will call your accountant to verify the income declared. As your broker, we will help you prepare your accountant for that.
Do Alt Doc Loans cost more?
Alt Doc Loan providers are providing easier forms of income verification, so they are conducting less due diligence and are quicker than a typical bank. The trade-off is that they do charge more for their services, which can include:
- A higher interest rate – this is adjusted for LVR and risk presented
- An establishment fee or risk fee – essentially an upfront charge
- Valuation and legal fees – where banks absorb these costs, non-bank lenders pass them on
When the LVR is low (i.e. you have a high deposit), and there are no credit defaults, the interest rates can still be very competitive when compared to a bank. However, the higher the LVR and the worse the credit history, the higher the interest rates and upfront fees charged.
Am I stuck in an Alt Doc Loan, or can I refinance?
No, you are not stuck in an Alt Doc Loan. If your income improves, and you are able to get your paperwork in order, you are able to refinance back into a bank. Alt Doc Loans can therefore be thought of as an interim solution to get what you want now while you get back on track and switch to a bank later.
Anything else I should know about Alt Doc Loans?
Many clients when they go to borrow get fixated on the interest rate, and this prevents them from moving forward with an opportunity and life generally.
While you should make every endeavour to secure a bank loan, if you are not eligible or simply sick of how the bank is treating you, you should keep an open mind towards Alt Doc Loan options. In our client base, we have all types of self-employed clients who have used Alt Doc Loans, from first home buyers starting out to the very wealthy who are seeking an alternative solution to the bank.