Low doc vs full doc: which gets you more borrowing capacity?

The business is profitable on paper, the returns are lodged and the add-backs are clear. Full doc opens every lender, the sharpest rates, LVRs to 90 or 95 per cent with LMI, and unrestricted purposes. For most established self-employed borrowers with a reasonable taxable income, full doc is the better product and the specialist will steer there.

The returns understate the business: heavy depreciation and deductions, a growth year not yet in the returns, a return not yet lodged, or a structure that leaves profit in a company the borrower does not want to distribute. Low doc on twelve months of BAS at a 50 per cent industry margin on $500,000 of turnover gives $250,000 of assessable income, which may be far above the taxable income in the return. The cost is the rate and the LVR cap, and cash out restrictions.

A specialist calculates the full doc assessable income from the returns with add-backs, and the low doc assessable income from the BAS with the margin each lender applies, then runs serviceability on both to see the maximum loan. Then they price the two loans over the expected holding period, including the rate difference and any LMI or risk fees. Sometimes low doc borrows more but costs enough extra that a smaller full doc loan is the better decision; sometimes low doc is the only path to the property.

Some lenders accept one year of returns plus BAS for the current year, which sits between the two and often produces the best combination of income and rate. And borrowers commonly start on low doc and refinance to full doc once the next return is lodged, which is why low doc loans should not carry long fixed terms or heavy exit fees.