Low Doc Construction Loans

Find out more about low doc construction loans and whether they’re the right option for you with Savvy.

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, updated on August 8th, 2023       

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The big banks usually ask for at least three payslips before they approve a construction loan.  So, what do you do if you’re earning a strong income but can’t supply all the right documents?  A low doc construction loan may be just the thing to help you build your first house.  Find out what low doc loans are with Savvy, as well as how to maximise your chances of successfully applying for one.

What are low doc construction home loans?

Low doc construction loans are loans which are primarily designed to help self-employed Australians access financing to build their home by allowing them to provide alternative documentation.  The term ‘low doc’ is short for low documentation, which means the borrower is not able to provide the level of documentation that major big banks may require to approve a normal construction loan.  In most cases, this is your last year or two years’ worth of tax returns.

With over 16% of workers in Australia now self-employed (according to figures from the World Bank in February 2022), many online lenders and non-bank lenders now provide what are called ‘non-conforming’ home or construction loans.  These low doc lenders provide competition to the big banks, but are regulated in the same way, so they’re just as safe as the traditional Big Four banks in Australia.

Low-doc loans are labelled ‘non-conforming’ because the borrowers aren’t able to conform to the strict lending criteria which are set by big banks; for example, the requirement to have been in the same job for more than six months.  On top of this, this type of loan will generally come with a minimum deposit requirement of 30% of the cost of construction, if not more.

Which documents will I need to get a low doc construction loan?

The information you’ll be asked to provide to prove your income may consist of a combination of any of the following documents:

  • Business and personal tax returns
  • Business Activity Statements (BAS)
  • GST registration certificate
  • ABN registration confirmation
  • Accountant's income declaration on letterhead
  • Business and personal bank statements

In addition to documents about the construction you intend to build (such as building plans and council approval), you’ll also need to provide your lender with the following basic information to be approved for a low doc loan:

  • your identification (at least one form of photo ID will be required)
  • your nationality or citizenship (to prove you’re an Australian citizen or have a permanent residency visa)
  • your assets (to prove what you already own and what assets you have)
  • your debts and liabilities (what you owe to other people)
  • your daily living expenses (what it costs you to live)

The exact level of documentation you’ll be required to provide will be less than what’s demanded by the big banks, but you’ll still need to prove who you are and what income and outgoings you have.  You can use this useful budget planning calculator to combine and record all the information about your living expenses and income that you may be asked to provide by a lender.

How are construction loans different from home loans?

Low doc construction home loans provide funds to borrowers in stages to enable them to build their home. These low doc mortgages can either have a variable interest rate or can be for a fixed term and have a fixed interest rate.  They’re often fixed interest-only loans for one year, meaning repayments are kept to a minimum during the expensive house construction process.  Unlike home loans, the lender’s money isn’t paid to the borrower but instead is released to the builder as each building stage is completed to the lender’s satisfaction.   Once the home is built, the low doc construction finance is either paid off, refinanced or the loan naturally reverts to a principal and interest variable rate standard home loan.

How can I maximise my chances of getting approval for a low doc construction loan?

To maximise your chances of getting construction loan approval, you need to work at presenting yourself as a low-risk borrower.  So, what do low-risk borrowers look like according to lenders?  Some of the tips to help you maximise your chances of getting loan approval are:

  • have a steady income over a sustained per
  • keep the same residential address, phone number and email address for several years
  • have a good credit score and pay all your bills on time
  • have low credit card limits and pay off your cards each month
  • don’t have other high-cost debt like payday or personal loans
  • don’t frequently apply to multiple lenders for credit, or have a history of loan rejections

Frequently asked questions about low doc construction home loans

How do low doc loan rates compare with home loan rates?

The reality is that low doc loan rates are generally higher than full-doc loan interest rates.  This is because of the perceived risk taken on by the lender in approving a loan for someone without the standard income documentation.

Is it better to get a principal and interest loan or interest-only low doc construction finance?

This will depend on your personal financial situation.  If you can afford the repayments on a principal and interest loan, you’ll start paying off the sum you borrow earlier and begin building equity straight away.  These are also cheaper in the long run.  However, if you’re struggling during the expensive construction phase of building your home, an interest-only loan will mean your repayments are lower at a time when you’re having to pay rent and construction costs at the same time.  Use Savvy’s handy interest-only mortgage calculator to work out how much your interest-only repayments may be.

Can I pay extra off my fixed rate low doc construction loan?

If you have a fixed interest rate loan for a fixed term to finance the building of your home, it’s unlikely the conditions of your loan will allow extra repayments to be made.  If you’re allowed to make extra repayments, you may find there’s a limit on the number you’re able to make or a cap on the total amount you’re permitted to pay off early.  However, if your loan reverts to a variable rate loan, you’ll find that additional repayments are permitted.  You can use Savvy’s extra repayments calculator to find out how much time and interest your additional loan repayments will save you when paying off the loan.

What happens if my home construction gets delayed past my fixed loan term?

If you have a fixed rate interest-only construction loan for one year and your home building is delayed, you should contact your lender as soon as you know there’s going to be a delay.  Your lender may be able to extend your loan period for a few more weeks or months or may suggest another loan variation which will help you cope with the construction delay.

Can I refinance my low doc construction loan when I have more documentation?

Yes – it’s possible to refinance your low doc construction mortgage if your life situation changes.  For example, this may come about when you reach two years of operation with your business and have the required tax returns.  You may meet the loan criteria of being employed by the same company for six months if you wait a while, or you may get a second income into your household if one partner returns to work after maternity leave.  If life circumstances do change, and you feel confident you’ve got more of the required documentation, it may be time to look at refinancing your home loan to one with a lower interest rate.

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