What is a low doc loan, and how does it compare with full doc?

A low doc loan is a home loan for a self-employed borrower who proves income with alternative documents, such as business activity statements (BAS), business bank statements or an accountant's confirmation, instead of the standard documentation a lender would normally ask for, such as a full set of lodged tax returns. Full doc, alt doc and low doc are industry labels. The Australian Prudential Regulation Authority (APRA) uses the term non-standard or alternative documentation, and says these loans can involve a borrower who is self-employed or has an uncertain income stream and is unable to provide standard documentation that enables easy verification of income.

Where standard documents are not available, APRA's guidance says lenders usually seek alternatives such as bank statement history, business activity statements, recent tax assessment notices or confirmation from an accountant. APRA also says it is not good practice to lend on limited verification of income where full verification is reasonably available, so alternative documentation is for borrowers whose situation means standard documentation is not reasonably available. The name is shorthand: a low doc loan still runs on documents, just different ones, and the lender still assesses whether the loan can be repaid.

Full doc and low doc loans differ mainly in which documents prove income, and each lender decides what its own products accept. APRA's guidance uses the term non-standard or alternative documentation; full doc, alt doc and low doc are industry labels. The table compares the two approaches in general terms only. APRA's guidance on pricing and LVRs applies to banks, deposit limits, fees and pricing vary between lenders and change over time, and no column is the right answer for every borrower.

The tax documents a self-employed borrower has available depend on the business structure, because each structure lodges a different tax return. The Australian Taxation Office (ATO) lists four commonly used structures: sole trader, partnership, company and trust. A sole trader reports business income in an individual tax return, with no separate business return. A partnership lodges an annual partnership return showing how income is distributed to the partners. A company is a separate legal entity that lodges its own company tax return. A trust lodges a trust tax return, and beneficiaries are generally taxed on the net income distributed to them. A company director or trust beneficiary can therefore have both personal and entity returns.

ASIC's responsible lending guide, Regulatory Guide 209, lists examples of information sources for self-employed applicants: recent tax returns, BAS, a statement from the accountant setting out actual or likely income, financial statements for related business entities, business account statements and bank statements. The guide to how lenders assess self-employed income covers how lenders read those documents.

Full doc tends to suit a self-employed borrower whose lodged tax returns and notices of assessment already show enough income for the loan. The ATO sends a notice of assessment after it processes an individual tax return, and the notice explains how the tax assessment was calculated. For individual tax returns lodged online through myTax or through a tax agent, the ATO says it aims to process them within 12 business days. Once that paperwork exists, the main reason for alternative documentation falls away. APRA's guidance makes the same point from the lender's side: it is not good practice to lend on limited verification of income where full verification is reasonably available.

Some borrowers in this position wait until the latest return is lodged before applying. Whether waiting makes sense depends on timing, the property and the numbers, which is a question about personal circumstances rather than general information. A free consult through self-employed home loans is the place to test that against actual documents.

Low doc tends to come up when a borrower is self-employed or has an uncertain income stream and standard documentation is not reasonably available. APRA notes that self-employed borrowers are generally more difficult to assess for borrowing capacity because their income tends to be less certain, and alternative documentation exists for that gap. Situations where a low doc loan is often discussed include:

• A new or recently restructured business without a full year of lodged returns.
• A growing business whose recent BAS show turnover well above the last lodged return.
• Tax returns still with the accountant, who may be lodging under the ATO's registered agent lodgment program and its own due dates.
• Income that is lumpy across BAS quarters, so one return does not reflect the current year. The ATO generally sets quarterly BAS for businesses with GST turnover under $20 million.

Two checks bear directly on the documents a low doc application relies on:

• Credit history, which APRA lists as checked through enquiries with credit reporting bodies.
• Consistency between business bank statements and the rest of the application, because an ASIC example in RG 209 says a lender could not ignore what the bank statements showed.

A low doc loan is not a no doc loan: under the National Credit Act, lenders and brokers must make reasonable inquiries about a borrower's requirements, objectives and financial situation, and take reasonable steps to verify that financial situation. ASIC explains these responsible lending obligations in Regulatory Guide 209. A loan is unsuitable if it is likely the borrower could not meet the repayments, or could only meet them with substantial hardship, so the lender needs evidence it can rely on.

RG 209 gives an example where a lender could not rely on a borrower's declaration about other debts and ignore what the bank statements showed. Credit history is part of the picture too: APRA lists enquiries through credit reporting bodies among the ways self-employed income is checked. The Office of the Australian Information Commissioner (OAIC) says anyone can request a free copy of their credit report to check what has been recorded.

At a bank, an alternative documentation loan can cost more than full doc in general terms. APRA's prudential guidance for banks says a prudent lender would address the increased risk of alternative documentation loans through appropriate pricing and significantly lower loan-to-value ratios (LVRs). A lower maximum LVR means the deposit needs to be larger to match. APRA's guidance covers banks, and maximum LVRs, fees and pricing differ between lenders, so no single figure applies across the market.

Lenders mortgage insurance (LMI) protects the lender, not the borrower, against losses if the borrower defaults, and APRA says LMI is not an alternative to the lender's own assessment. The lenders mortgage insurance guide explains how LMI works, and the FundUp calculators give a general sense of repayments and borrowing power before a conversation with a broker.

Moving from low doc to full doc usually means refinancing once lodged tax returns and notices of assessment show the income, and the new loan is assessed afresh like any other application. The general steps are:

1. 1Lodge the outstanding returns. A registered tax agent or accountant lodges the personal and entity returns a full doc lender will want. The timing and content of those returns are tax questions for them, not for a broker.
2. 2Collect the notices of assessment. The ATO issues a notice of assessment after it processes each individual tax return, and full doc applications lean on the most recent ones.
3. 3Compare full doc options. A broker can compare full doc products across lenders, and mortgage brokers must prioritise the borrower's interests where there is a conflict, under duties ASIC explains in Regulatory Guide 273.
4. 4Apply to refinance. The new lender assesses income, expenses, credit history and the property again, so the outcome depends on that assessment.

FundUp's refinancing page covers how a refinance is arranged.

A mortgage broker can compare low doc and full doc options across many lenders, which matters because documentation rules differ between them. FundUp is a Cairns-based mortgage broker that arranges home loans for borrowers Australia-wide and says its panel is over 40 lenders. FundUp states its service is free to the borrower because the lender pays the broker when the loan settles. This guide is general information only; a conversation with a broker looks at the actual documents, business structure and goals before any recommendation.