Low doc vs full doc — what's the difference?

Two ways of evidencing the same income

The names describe the paperwork, not the borrower. A full-doc application evidences income with completed tax returns and financial statements. A low-doc application evidences it with something else the lender is prepared to accept, such as Business Activity Statements, business bank statements or a declaration from an accountant.

Both are assessments of whether the loan is affordable, and that point gets lost surprisingly often. Low doc is not a lighter standard of affordability, and it is not a way to avoid documenting income. It is a different set of documents pointed at the same question, used where the conventional set does not exist yet or does not describe the position accurately.

This guide is general information rather than advice about your circumstances, and lender policy on all of it changes regularly. Treat it as a map of the differences rather than a statement of what any particular lender will do today.

What a full-doc application asks for

Full doc is the default. For a self-employed borrower the usual set is:

• Personal tax returns and the matching ATO notices of assessment
• Business tax returns and financial statements, generally a profit and loss and a balance sheet
• Company or trust returns, where you borrow through an entity
• Details of every existing commitment, personal and business, including anything guaranteed personally
• Evidence of the deposit or contribution, and where it came from

How many years are required varies between lenders and products. Two is the common expectation, and some lenders will consider one where the position supports it. The assessor takes those figures, applies the add-backs their policy allows, and arrives at an assessable income that can look quite different from the taxable income on the return.

The practical requirement underneath all of it is that lodgements are current. An assessor works from what has been lodged and assessed rather than from draft figures, so a business behind on its returns is often a full-doc application waiting on an accountant rather than a low-doc candidate.

What a low-doc application accepts instead

Where completed financials are not available, or do not reflect current trading, some lenders will consider alternative income verification. Depending on the lender, that may include:

• Business Activity Statements covering a recent trading period
• Business bank statements, showing what the business actually receives
• A declaration or letter from your accountant about your income
• Reduced tax-return requirements, such as one year rather than two
• Other supporting evidence of recent trading

Lenders weight this evidence very differently. Some build their assessment around BAS. Others analyse bank statements. Some accept an accountant declaration and others will not consider one. Which evidence you can produce naturally therefore has a large say in which lenders are worth approaching at all.

What does not change is the obligation on the lender. Australian lenders carry responsible-lending obligations, so a low-doc borrower still has to demonstrate that the repayments are sustainable. The evidence changes; the requirement for evidence does not.

Pricing, deposit and loan-to-value ratio

There is usually a trade-off, and it is worth understanding before you choose a route.

Low-doc products can carry a higher interest rate than an equivalent full-doc loan, and some lenders require a larger deposit or apply a lower maximum loan-to-value ratio, because less conventional income documentation is being relied on. Some also apply tighter conditions on the security, the loan purpose or the maximum amount.

How much difference any of that makes depends on the lender and on the individual circumstances, and the settings move. Any specific figure you find online, including anything you read here on a later visit, should be checked against current policy before you rely on it.

The useful comparison is not low doc against full doc in the abstract. It is the actual full-doc option available to you today, if there is one, against the actual low-doc option, costed over the period you expect to hold the loan.

When low doc may be the appropriate route

Low doc is a tool rather than a category of borrower. It tends to be worth considering where the conventional evidence does not describe the position:

• The business is trading but has not yet completed two financial years
• The latest financial year has not been finalised, so the available figures are out of date
• Taxable income is affected by depreciation, retained profits or trust distributions
• Income is drawn through a structure that does not resemble a PAYG salary
• The trading record exists in BAS and bank statements before it exists in lodged returns

It is worth being equally clear about when it is not the answer. Low doc does not make a business that is not performing look like one that is, and it is not a way to support a borrowing figure the trading does not support. A lender assessing alternative evidence is still assessing evidence.

Choosing the lender before you apply

Self-employed policy varies more between lenders than almost anything else in lending. One will build an assessment around BAS. Another wants bank statements. A third accepts an accountant declaration. A fourth will not consider the structure at all.

That variation is the reason to work out where an application belongs before it is lodged rather than after. Every formal application leaves a mark on your credit file, and a trail of enquiries is itself something the next assessor has to interpret. Applying once, to a lender whose policy fits the evidence you have, protects the file in a way that applying widely does not.

It also changes what you are asked for. Knowing early that a particular lender wants two quarters of BAS and a signed accountant letter turns the document gathering into a short list instead of a series of surprises.

Moving from low doc to full doc later

For some borrowers, low doc remains the appropriate structure for as long as they hold the loan. For others it is a stepping stone, and it is worth deciding which one you are looking at before the first loan is written.

What usually changes the position is time and paperwork rather than anything dramatic: another completed financial year, updated tax returns that reflect current trading, or a change in how income is drawn and evidenced. Once conventional financials exist, refinancing to a full-doc loan may become possible, subject as always to the lender assessment at that time.

The reason to think about it early is that it can influence the first decision. A loan you expect to refinance in eighteen months is a different proposition from one you expect to hold for ten years, and fixed terms, exit costs and loan structure all read differently in that light.

Where to start

The first useful step is not choosing between low doc and full doc. It is working out what evidence you actually have, and what the last two years look like once someone has read them properly.

At BleuHaven Finance we work with self-employed borrowers across the Mornington Peninsula and the South Eastern Suburbs, and a conversation about your position costs nothing. We will tell you plainly what we think an assessor will make of your figures, which route looks realistic, and whether waiting for a lodgement would put you in a better position than applying now.

This guide is general information only. It does not take your objectives, financial situation or needs into account, and it is not tax, legal or accounting advice. All lending is subject to lender assessment and individual credit criteria, and no application is guaranteed. Lender policies change frequently, so anything that matters to your situation should be confirmed for your circumstances before you act on it.

Related reading

Guide

Securing a home loan when you're self-employed

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Can I get finance without two years of financials?

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Low doc and self-employed lending

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