Low doc loans explained for self-employed borrowers

Being self-employed has plenty of upsides, but applying for finance isn't always one of them. Lenders like neat, predictable paperwork: payslips, an income statement and two years of tax returns. If you run your own business, your income might be lumpy, your latest tax return might be months behind, or your accountant may have legitimately minimised your taxable income. That's where low doc loans come in.

What is a low doc loan?

A low doc (low documentation) loan is designed for self-employed borrowers who can't easily provide the standard income evidence lenders usually ask for, such as recent tax returns and notices of assessment. Instead, the lender accepts alternative documents to verify income.

The name is a little misleading. Low doc doesn't mean no doc. Under responsible lending obligations, lenders still need to be satisfied that you can afford the loan. They simply verify it differently. You'll sometimes hear the term "alt doc" (alternative documentation), which describes this more accurately.

Who are low doc loans for?

• Sole traders, contractors and freelancers
• Small business owners operating through a company or trust
• People who've recently grown their business and whose tax returns don't yet reflect current income
• Business owners whose tax returns for the latest financial year haven't been lodged yet
• Borrowers with income that varies through the year, such as seasonal businesses

Most lenders want you to have held an active ABN for a minimum period, often a year or two, and some want to see GST registration. Exact requirements vary from lender to lender.

What documents might be accepted?

Different lenders accept different combinations of documents. Common examples include:

Lenders will usually still ask for identification, details of your assets and liabilities, and a picture of your living expenses. Keeping your BAS lodged on time and your business and personal banking separate makes a real difference to how your application reads.

Low doc loans for different purposes

Low doc home loans

Some lenders offer low doc home loans for buying or refinancing property. These often come with a lower maximum loan-to-value ratio (LVR), so you may need a larger deposit or more equity than with a full doc loan. Depending on the LVR, lenders mortgage insurance may apply.

Low doc vehicle finance

Low doc options are common in business vehicle finance, such as a chattel mortgage for a ute, van or car used mainly for business. Some lenders have streamlined processes for established ABN holders up to certain loan amounts.

Low doc equipment and business loans

Tradies and business owners can sometimes use low doc assessment for equipment finance, think excavators, coffee machines or medical gear, and for some business loans. The equipment itself often acts as security.

The trade-offs

Low doc loans can be very useful, but they involve compromises. Because the lender is relying on less traditional evidence, it may be taking on more risk, and that can show up as:

• Higher interest rates than an equivalent full doc loan
• A lower maximum LVR or loan amount
• Higher fees, or lenders mortgage insurance at lower LVRs
• Fewer product features
• A narrower range of lenders, as not every lender offers low doc products

For some borrowers, a low doc loan is a stepping stone. Once your tax returns catch up and show a solid income history, you may be able to refinance to a full doc loan.

A practical example

Mia is an electrician who left her employer and set up as a sole trader 18 months ago. Business has been strong, but her first tax return as a sole trader only covers a few months, and her second hasn't been lodged yet. She wants to finance a $60,000 ute for work.

A full doc lender might look at her one lodged return and conclude her income is low. A low doc lender, by contrast, might consider her last four quarters of BAS, six months of business bank statements and a letter from her accountant, giving a more accurate picture of what she earns now.

This is the kind of situation where a specialist broker from our partner network can help, because they know which lenders accept which documents and how to present a self-employed application clearly.

How to strengthen a low doc application

1. Lodge your BAS on time. Consistent, up-to-date lodgements are one of the clearest signs of a well-run business.
2. Separate business and personal accounts. It makes your income much easier to verify.
3. Talk to your accountant early. They can prepare a letter or declaration and explain how your tax position may affect your borrowing. Make tax decisions with your accountant, not around a loan application.
4. Tidy up your credit file. Pay any overdue debts, including any ATO debt, or have a payment arrangement in place.
5. Save a deposit. A larger contribution can widen your options.
6. Be accurate in your declarations. Overstating income is never worth it and can have serious consequences.

Is a low doc loan right for you?

If your tax returns are current and show a healthy income, a full doc loan may give you more choice. If they don't reflect what you're earning today, a low doc loan could bridge the gap. Either way, it's worth getting a clear picture of where you stand before applying, since multiple declined applications can affect your credit file.

The Finance Club can connect you with a specialist broker from our partner network who works with self-employed borrowers. They can look at your situation, explain which documents may be accepted and help you understand your options. You can start an enquiry here.

This article is general information only and does not take into account your objectives, financial situation or needs. Speak to your broker, and your accountant where tax is involved, before making a decision.