The British financial services regulator has announced plans to ban so-called self-certified home loans, pointing to the possible fate of no-doc and low-doc loans in Australia once responsible lending laws start to come into force here from mid-2010.

No-doc and low-doc loans are an alternative for the self-employed and small-business people who, without payslips or recent tax returns, can't readily verify their sometimes "lumpy" income for a standard home loan.

Instead, they're able to secure loans with a bigger deposit or by signing a statement simply declaring they can afford the repayments.

Low-doc borrowers usually have to come up with a 20 per cent deposit, when others might need just 10 per cent.

In addition, the bank is almost certain to insist on mortgage insurance, which protects the lender if the borrower defaults. On standard loans, insurance is required if the loan is for more than 80 per cent of the value of the property but on a low-doc loan, it may be required at the 60 per cent mark.

Lenders might also charge a higher interest rate to compensate for the extra risk associated with a no-doc or low-doc loan, the corporate affairs manager for Mortgage Choice, Kristy Sheppard, says, though this may be reduced to the standard rate after a couple of years of regular repayments.

In Britain, however, the Financial Services Authority has issued a discussion paper proposing self-certification be banned and that lenders be obliged to verify income for all mortgage applicants.

At their peak, self-certified loans accounted for 45 per cent of the £300 billion of mortgages advanced in Britain during 2006-7, according to one report. Ordinary homebuyers are said to have used them to borrow more than their genuine income would allow.

Under the new proposals, the self-employed and business people would have to provide at least two years of accounts or tax returns to support a home loan application.

Locally, low-doc mortgages also grew in popularity - but not to the scale in Britain - and market observers say they're much harder to come by here.

"There are fewer low-doc loans around these days because lenders have become more risk-averse in recent years - more cautious about whom they lend to," Sheppard says.

"Those that are still offering these products do require some evidence, such as business account transaction statements and BAS [business activity statements], where these weren't required previously."

The chief executive of InfoChoice, Shaun Cornelius, says its database includes 58 low-doc products, from 32 lenders, with rates ranging from 5.38 per cent to 8.49 per cent. That compares to 6.2 per cent or 6.3 per cent for a standard variable loan with a big four bank.

However, "lenders certainly haven't been promoting this category of loans over the last 12 months", Cornelius says.

The head of mortgages at Bankwest, Dean Gillespie, says the demand for low-doc loans has remained constant but Bankwest, like others, has reviewed its activity in the area. "We are conscious of making sure applicants really are true low-doc borrowers," Gillespie says.

Scrutiny has increased, he says, particularly if an applicant claims a higher income than the bank would expect for their circumstances. "We are asking more questions. We are wanting to see their ABN, that they're registered for GST, to see that they're a legitimate low-doc borrower."

Sheppard says low-doc loans have a place because many self-employed people find it difficult to substantiate income when applying for home or investment property loans. The traditional requirements of lenders can make the process "frustrating and time-consuming" for them, she says.

"There are certainly circumstances where people need to use low-doc loans because they can't provide the documentary evidence required by lenders to approve borrowers for 'regular' loans - for example, if the applicant hasn't done tax returns for the past couple of years, has debts outstanding that don't reflect the cash position or can't prove profit to the banks."

However, consumer groups say low-doc loans have been used by "predatory" lenders on the fringe of the market. They give people loans who have little hope of servicing them in the knowledge that ultimately they can force the sale of the property and take the money.

In some cases, ordinary borrowers have been encouraged to dress themselves up as businesses by obtaining ABNs.

Credit ombudsman Raj Venga says low-doc lending seemed to dry up last October and he's "not unhappy that some of the worst kinds of low-docs" are gone, though he acknowledges they have a legitimate role.

Venga notes lenders will soon have to comply with "responsible lending" rules requiring them to determine that a loan is "not unsuitable", having regard to the person's needs, objectives and financial circumstances.

"I think it will make it very hard to have a low-doc loan," he says.

The responsible lending laws apply to non-bank lenders from July 1 and to banks from mid-2011.

Gillespie says the provisions of the new Consumer Credit Code will put more onus on the financial institution or broker to have an understanding of what's "not unsuitable". "That hasn't been tested yet ... and it's going to be interesting the way it comes out, whether low-doc products can continue or not," he says.

The British proposals, if approved, could take effect at the end of next year.

Key points

British regulators have proposed banning no-doc loans.

Here, low-doc loans are under threat from "responsible lending" rules.

Lenders have backed away from riskier lending products anyway.

Low-doc applicants are being asked to prove they're genuinely self-employed.