Low Document lending in the current environment

You may have observed media commentary over the past months discussing the “reckless” lending of banks to self-employed customers via the misunderstood structure of Low Document [Low Doc] lending.
The original concept of this form of financing reflected;
  1. Mature businesses [older than 2 years] needing to borrow because their latest tax returns had not been completed.
  2. The overall gearing of property was limited to 60% of the property value.
  3. The directors of the business certified that they could afford the repayment and that the additional cash flow impost would not detrimentally impact on their business, and
  4. Future earnings would also assist in meeting future mortgage obligations.
When the credit crunch associated with the Global Financial Crisis [GFC] happened many businesses suffered a fall in revenues and struggled to meet all financial obligations. This together with falling property values & borrowers who should never have been able to use this borrowing structure started to default on mortgage repayments at a greater degree than those who held a traditional mortgage.
It should be noted that the mainstream Low Doc market provides borrowers and companies with good credit ratings an opportunity to leverage their property. Prior to 2002, companies relied upon the technical skills of their mortgage broker or bank manager to demonstrate capacity to service all debts.
Much has now changed for those wishing to borrow under this structure. These include;
  1. Businesses having an ABN for a minimum two (2) year period.
  2. Providing copies of the businesses’ last four (4) BAS quarters.
  3. ATO Tax Portal confirmation of lodgement of BAS & tax returns and those ATO payments are up to date [repayment of tax debts is an unacceptable purpose of this form of financing].
  4. The last three (3) months of bank statements demonstrating revenues and debts being serviced from this account, and
  5. Rental statements for any investment property you own.
In many cases this form of verification actually more thorough than providing annual tax returns. Tax returns effectively reflect the historical earnings & profitability of a period up to 18 months in the past!