Low doc loans not all bad

Australian lenders do better than most when it comes to low doc loans, albeit that borrowers using such products are three times more likely to default, according to an assessment by ratings house Cannex.

Cannex said that despite the low documentation loan sector’s relatively negative portrayal, there were many excellent products available in Australia that rewarded consumers for good repayment behaviour.

“It is not all bad because if you prove yourself with a good repayment track history, there are 12 low-doc lenders who will respond by discounting your interest rate,” Cannex financial analyst Lauren Newlands said.

She said that low doc borrowers could wind back their interest rate to the normal variable rate by proving to their lender that they posed no higher risk than if they had applied for a traditional mortgage.

Newlands said even though they cost more, low documentation loans opened up the home loan market to people who previously would have been excluded, such as the self-employed, recent immigrants, those with fluctuating income levels and people living off commissions or investments.

However, in its assessment of low doc home loans released this month, Cannex evaluated 180 eligible products and gave its five star status to only 17.

What is more, Newlands said that a generous discount offer after a period of arrears-free repayments could indicate that the initial interest rate on offer was far too high.

What is more, she said that consumers might also find that the so-called ‘discounted’ rate was actually higher than an ordinary rate offered by a lender who did not discount.