4 reasons to focus on low doc loans in 2016
March 9, 2016
Since the tightening of regulations in recent years, the Australian Securities and Investments Commission (ASIC) reported that practices around low doc loans had significantly improved.
A 2014 release from the body noted that the consumer base for these products was reduced to people without readily identifiable income; information verification had improved, and more paperwork was being sought to make sure a non-conforming home loan would be sustainable for the client.
Self-employed Australians often require a low doc loan.
This also resulted in a decline in the market. ASIC reported that the Australian Prudential and Regulatory Authority recorded a drop in the number of low doc loans being issued, a suggestion that the market was indeed much more sound. However, many Australians still need to secure this type of non-traditional mortgage.
Accredited mortgage brokers have the power to offer a wide range of low doc loans to suit a whole variety of financial situations that don’t fit traditional lending criteria. On top of this, there are many reasons to continue focusing on these products throughout 2016. Let’s take a look at them:
- Interest rates remain historically low
While interest rates on low doc loans tend to be higher than on regular mortgages, they are still at an identifiable low point. Canstar’s September 2015 low doc report noted that on average, a standard variable low doc mortgage interest rate will be 0.53 per cent higher than on a traditional home loan, at 5.43 per cent.
It’s crucial to keep in mind that we’re still in a low interest rate environment.
The difference can seem negligible to consumers, but it’s important to illustrate how much that adds up to over a long loan term. Perhaps more importantly, it’s crucial to keep in mind that we’re still in a low interest rate environment. As of its February 2 meeting, the Reserve Bank of Australia has now held the official cash rate at 2 per cent for nine months.
This is the sort of stability that can really bolster confidence among people requiring low doc loans. Highlighting this could help brokers find clients the right non-conforming loan with ease.
- The risks of low doc loans are often overstated
In the Genworth Spotlight Series that focused on low doc loans, Country Executive Director Peter Hall noted that the dangers involved in taking out a low doc loan were often unfairly over-represented. He explained that high arrears rates were simply due to the irregular income streams that these borrowers often have. Fly In Fly Out workers, contractors and the like often have adequate income, but irregular payments induce these arrears.
Miners could be one type of employee that requires a low doc loan.
Meanwhile, Hall added that delinquencies in the mortgage market overall were increasing due to other factors, particularly real estate conditions in New South Wales. Effectively, people with low doc loans fall often into arrears due to the nature of their income, rather than an actual inability to keep up with repayments. And even when low doc delinquencies stretch past the 90 day mark, Hall states they do not necessarily turn into defaults.
With an 80 per cent LVR cap on many prime low doc loans, there is an assured degree of safety for a wide range of products.
Moody’s noted on February 1 that delinquencies on home loans were expected to rise throughout 2016, so it will be interesting to see whether low doc loans play a part in this. For now, accredited mortgage brokers should continue doing their utmost to ensure people with irregular income are still capable of repaying their mortgage.
- Brokers are more prevalent than ever
As the mortgage broker market enters the mature phase of its life cycle, market penetration is reaching excellent heights. In November 2015, the Mortgage and Finance Association of Australia (MFAA) noted that brokers sourced 52.6 per cent of all residential lending for the September quarter. Additionally, brokers were the source of 82 per cent of the growth in lending.
“Customers consistently find that dealing with brokers delivers an enhanced customer experience.”
“These figures illustrate that customers consistently find that dealing with brokers delivers an enhanced customer experience,” said MFAA CEO Siobhan Hayden.
This is especially true when it comes to low doc loans. The Genworth Spotlight Series states that mortgage brokers were directly responsible for the growth in popularity of low doc mortgages, particularly through work with non-bank lenders.
“Through lenders’ education of the market via advertising, marketing and product training, brokers helped find real solutions to self-employed borrowers’ needs,” Hall added.
IBISWorld predicts slower revenue growth for the broker industry in the next few years, but higher competition as more businesses enter the market. A broker’s ability to educate on and facilitate low doc loans could be a key to getting ahead in a crowded market.
- Prices could be due for a drop
The LVR restrictions put on low doc loans can prove a significant barrier for borrowers, especially with the high prices of real estate on the east coast at the moment. However, a recent CoreLogic RP Data release indicates that some areas are set to drop in value. The organisation’s Hedonic Home Value Index at February 1 saw monthly drops in property values across Brisbane, Perth and Darwin.
The price of a new home could be tempting for low doc borrowers in 2016.
Meanwhile, Sydney has slowed down to the point where Melbourne is now the top-performing capital city in the country. With BIS Shrapnel predicting real value declines in many of these centres, 2016 could prove to be a time when the amount required for a deposit declines somewhat, offering self-employed Australians a new window of opportunity.
Of course, even a drop in value does not make property in Australia objectively cheap – especially for someone taking out a self-employed home loan. After providing all of the extra documentation required to get approval, there is still the matter of contending with deposits, higher interest rates and the potential for higher volatility in rate changes.
Accredited mortgage brokers need to take the utmost care with these products and clients. Even though negatives around these loans tend to be overstated, irregular income or self-employed reporting of funds carries its own set of risks.
In-depth research with customers and a wide set of products to suit Australia’s ever-changing employment landscape is key. Canstar reported last year that there were 1.2 million sole traders working in our country – brokers have to work to make sure they are afforded the same opportunities as the rest of Australia.