There are arguments for and against.

In recent months lenders have tightened their “Lo Doc” loan requirements (we expect competition will see some of these things relaxed as we move forward away from the effects of the recent credit crisis). I will address your question with consideration to the current lending restrictions, however.   

Loans that require no income declaration (No Doc loans) and those that require no proof of income, rather just an income declaration  (Lo Doc loans) were originally intended for the self employed. Self employed workers do not receive pay slips and often don’t have their tax returns prepared until many months after the end of a financial year. It would be extremely difficult for these people to borrow money any other way. 

Another reason why the self employed may use a No Doc loan is that their accountant will generally help them (legally) reduce their tax liability and thus their taxable income. This can result in them not qualifying for a Full Doc loan that they would have qualified for had they earned the same income as a PAYG employee. A Low Doc loan may allow them to qualify for funding as they are not asked to declare an income… just their ability to afford the repayments. 

Over time many property investors with limited serviceability (or those wanting to bypass the complicated application requirements of a Full Doc loan) have chosen go go down the path of Low Doc and No Doc as an easier option. 

While in some instances a Low Doc loan may allow borrowings of up to 90% LVR they are generally capped at 80% and will incur some mortgage insurance. To my knowledge with a No Doc loan 80% LVR is the most any lender will offer (again with some LMI; or “Lenders Mortgage Insurance”). As an investor accumulates multiple investment properties they generally hit their serviceability  ceiling. These more flexible loan types may prove to be an option at that time. 

Typically when making application for a Low Doc or No Doc loan you are going to be asked for evidence that you: 

1. hold an Australian Business Number “ABN” and   
2. are registered for the Australian Goods & Services Tax “GST” (VAT in some countries)   

Generally these registrations need to have been held for a minimum of 24 months; although some lenders may only require you to have been registered for 12 months (and a very few just 1 day BUT at a higher interest rate). 

Where someone’s business turnover is less than $75,000 per annum, there is no requirement to register for GST. I suspect that this is why you accountant has said that there is no need for you to register (and he’s right). Most lenders still require this of you (regardless of your income) should you seek a No Doc or Low Doc loan. This would be why your broker has contradicted your accountant with his suggestion (and he’s right too). 

Here is an example of one lender’s Lo Doc loan criteria: 

1. no financials required   
2. must have asset and liability declaration   
3. signed declaration of income required   
4. must have ABN   
5. borrow up to 90% (or 80% with a No Doc loan)   

NB: A No Doc loan is by definition a type of equity loan and carries with it no income declaration requirement.

Many property investors, including me, like to keep all our lending options open. Waiting until I need a Low Doc or No Doc loan before applying for an ABN (and GST registration) will render my options very, very limited; in fact almost non existent! Even though I may not need these registrations in the foreseeable future, I like to be prepared so that I can take advantage of any future opportunity that presents. 

Registering for an ABN is FREE and having an ABN does not impose administrative obligation upon me. Therefore, in my opinion there is no down side in doing so. If you do not have an ABN and would like to apply for one now, you can do so on the other side of this ABN Link. 

There is a very minimal yearly reporting requirement for those registered for GST. While I’m sure this turns some people off bothering to register, in my opinion the upside in doing so far outweighs the inconvenience. Again, you can register for GST on the other side of this GST Link. 

Such very simple, yet often overlooked actions such as these two registrations may just actually make a huge difference to the quality of retirement that someone enjoys; that is by avoiding the potential “opportunity cost” of being limited with our financing options. 

Happy Investing, 

Author: Nick Lockhart

mrd your property investmentmentor.com.au  

http://www.investmentmentor.com.au