Stuart Wills of Mortgage Link explains the rise in popularity of low doc home loans.
When the Global Financial Crisis hit, the Low Doc (Lo Doc) or No Financials (No Doc) loans basically disappeared overnight, making it difficult for anyone who was not able to prove their income to get a home loan.
Low Doc Home Loans Available Again
There has always been demand for low doc loans, but lenders have been reluctant to make these types of loans available as many lenders and banks had experienced issues with these loans.
But now low doc home loans are becoming more popular again as both the banks and non-bank lenders get comfortable with property values and the risk of lending to borrowers who are unable to prove their incomes.
Non-Bank Lenders Have More Options
These low doc home loans have been re-launched to the New Zealand market mostly by the non-bank lenders, including some specialist lenders, solicitor nominee funds, private lenders and finance companies.
Low doc home loans are available for up to 90% of a property’s value, but most lenders will limit the lending to approximately 80%. Going beyond 80% of the property value starts to limit your choices and the costs can get high as the lenders deem risk increases.
Who Needs Low Doc Home Loans?
There are many instances when low doc home loans are needed.
Cash flow issues: Low doc loans help many borrowers when they have good equity in a home or commercial property, but as a result of the recession there have been cash flow pressures. There are times when people may want to refinance to consolidate other more expensive or short-term debts, inject further capital into a business, or cover an outstanding tax account.
Mortgage repayments in arrears: Low doc loans help many borrowers who have good equity in a home but have been struggling to meet their mortgage repayments. These sorts of low doc home loans can act like bridging loans providing the borrowers with time to sort out any financial issues.
Relationships do fail but your home loan must be paid: Often a relationship breaks down at a time when finances are tight. Low doc home loans may be the best way to raise finance to pay off the departing spouse. You are in a better position to negotiate if you have the ability to access money and therefore often any additional costs associated with low doc loans can be balanced against the savings you may be able to negotiate.
Finance Company Loans Offer Short-Term Solutions
Often the low doc home loans you may see advertised are short-term loans offered by finance companies, and while these loans can be helpful they can also be an expensive option. It is not uncommon to see low doc home loans with establishment fees of 3% (or more) of the loan amount, and the interest rates can be high too.
The low doc loans offered by finance companies can be useful, but you would want to know that there is a clear exit strategy so you do not get stuck with high cost loans for too long.
Some non-bank lenders offer short-term loans, but often they will be able to offer loan terms of two years or more. Resimac Home Loans and Liberty Financial are both non-bank lenders that are able to offer full 30-year low documents home loans.
Find A Mortgage Broker
While the idea of low doc home loans may make sense to you, often your bank cannot understand why you may be in a situation where you are unable to “prove” your income. Bank staff are paid salaries and cannot always grasp the concept that for self-employed people cash flow can and does vary, and at times paperwork is not always completed in a timely manner.
Mortgage brokers are the best source of these low doc loans so it is important to find a mortgage broker who understands these loans and also has access to all of them.
Stuart and Erica Wills of Mortgage Link can assist with all of your mortgage needs. www.mortgagelinkauckland.co.nz