Q:I’m having problems getting a low-doc loan. I have a couple of properties in a trust and would like my next property to also be in a trust. I can get a loan with a 40% deposit or if I put the property in my own name, but they are two options I don’t really want or can’t do. Being self-employed and not required to register for GST makes it hard for me to ‘service the loan on paper’ as some of my income is of a cash nature.
I have been told by a broker that if I have been registered for GST for at least one year then I can virtually declare anything income-wise on my low-doc loan. Even if I declare less than the GST cut-off with the ATO, what would my requirements be with them? Is there any other way around it you can think of?
Answer 1:Unlike before the GFC, there is now only a handful of lenders who are lending out low-doc loans to trusts. It is not impossible to source this type of finance though, and an experienced mortgage broker will be able to give you several options to consider.
With respect to the income declared on a low-doc loan, I think no one should ever declare more income than what they actually earn (cash or otherwise). Banks use the declared income as a benchmark with which to assess your borrowing capacity, and skewing this can result in borrowing more than you could afford to repay, which has disastrous outcomes.
Low-doc loans are generally more feasible when in the name of an individual. Over the last 2–3 years in light of the GFC, many lenders (major banks in particular) have really tightened their guidelines around high risk loans such as low-docs. It is not so much the banks, rather the mortgage insurers (of which there are only three operating in Australia) that have tightened their policies.
One must remember that the banks and mortgage insurers are evaluating risk, and if they’re not willing to extend finance to low-doc borrowers, then one must ask themselves why. To put it another way, if they’re not willing to take the risk, why should you? My point in this is that you should proceed with a great deal of caution when seeking to borrow under low-doc. One of our finance panel members, ArmenVartazarian from Adfin, says he has encountered dozens of cases over the past 12 months where borrowers with low-doc loans obtained interest rates that were 2% and even 4% higher than their full-doc loan counterparts. Most borrowers in these situations are to this day locked in due to declines in property values, mortgage arrears and exorbitant early termination fees.
On the point of GST registration, your broker advised you to register for GST for over 12 months because this is what the banks and mortgage insurers are demanding.
The rationale is simple. For a business to have turned over anything more than $75,000, it must have been registered for GST due to the ATO guidelines. One cannot possibly declare to have earned $75,000 or more if their business was not registered for GST (few exceptions exist, however we are not dealing with the ATO, we are dealing with credit policy).
If your borrowing or financing strategy requires you to use low-doc loans, it is advisable to follow the following list of ‘must do’s to ensure you’re prepared well into the future:
- Register your ABN for GST purposes
- Make sure you’re lodging your BASs
- Make sure you are using your business bank account regularly. Avoid cash jobs and non-declared income and expenses like the plague! Aside from being illegal, a cash income can severely distort the true health of your business, and will result in difficulty obtaining finance of any type
- Make sure your business bank trading account is never overdrawn, dishonouring direct debits and cheques etc… ensure you are squeaky clean
Credit policy with most lenders now requires the provision of 12 months’ BAS statements, and this is used to average turnover and then compare it to your declared income. If it doesn’t make sense you will be declined.
– Pino Tedesco
Pino is a director at Capital Property Advisory, a qualified valuer, and has a solid background in property acquisition, due diligence and valuation.
Answer 2:You do have options as there are still low-docs around – even a few which will lend to low-doc trusts at 80% LVR. The rates may be slightly higher but there are one or two lenders that could help you out.
You don’t need to be GST registered but it will all come down to serviceability. To get the loan approved you may need a certain income for the loan to service. If it’s higher than $75,000 then obviously you would need to be GST registered. There would be no way around that.
It would come down to what is more important – continue investing and be GST registered and complete quarterly BAS statements, or continue down your current path.
Your current broker isn’t quite correct either: you can’t necessarily declare any income you want if it’s been GST registered for 12 months. It would only seem reasonable to the lender that your income could go up by 20% in one year so they would ask questions if it’s higher than $90,000 to $100,000.
But in saying that, you don’t just want to declare whatever it takes to get the loan through – you need to be able to meet the repayments, so while you can be optimistic with the income, it’s not in your best interest to blow it out of the water and just declare anything.
Each lender has a different servicing calculator so you may have different options with different lenders.
– Michelle Coleman & Lee Dittmer
Collectively, Lee and Michelle have 37 years’ experience in the finance industry and make up Who Finance. They are both award- winning mortgage brokers and are active property investors
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