27th June 2007
Low doc lending – what’s all the fuss about?
You have probably read in the papers recently about the increasing popularity of what is called “low doc” lending. So, what is “low doc” lending, and what is La Trobe’s position on it?
Traditionally, a lender considers three separate criteria in deciding whether to lend money to a potential borrower, where the loan is to be secured by a mortgage over real property. These are called the “3Cs” which look at a borrower’s:
- Character – are they creditworthy and responsible?
- Capacity – will they be able to service the loan?
- Collateral – is there sufficient value in the property to secure the loan?
After assessment of the above a lender will then require substantial documentation, such as tax returns, payslips and the like, to support the character, capacity and collateral assessment of the potential borrower. This approach is called “full doc” lending; it is very time-consuming and some lenders Application Forms can be up to 20 pages long.
La Trobe, introduced “low doc” lending in 1990, and recognised that there is a different, but equally valid, approach to “full doc” lending, which however does not necessarily compromise the quality of lending.
La Trobe, in its approach to “low doc” lending, still applies the “3Cs” principles. We still obtain an independent credit check on the potential borrower, we still obtain self certification that the borrower can service the loan, and we still obtain an independent valuation of the security property from an independent and qualified valuer. However, the way we obtain the information is streamlined, and requires less supporting documentation, which benefits all parties involved. For example, La Trobe’s Application for Finance is only 2 pages long, and borrowers who are “time poor” appreciate this simplicity.
Are there any downsides to “low doc” lending? With less supporting documentation, there is room for the borrower to provide misleading information in the application for the loan. However, with the deterrent effect of significant criminal penalties for obtaining finance by deception in all States in Australia, and with the appropriate application of the “3Cs” principles, La Trobe has found that the potential problem of misleading information being provided by the borrower can be largely alleviated.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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