These lenders have recently run an advertising blitz – you have probably seen ads for nohassle, no-documentation, no-problems home loans.

Nicholas Gruen, the managing director of discount mortgage broker Peach Home Loans, says these specialist loans fall within two main types. Lowdocumentation loans are targeted at people whose taxable incomes are lower than their capacity to service their debt. Gruen says the prime candidates are the self-employed, though these loans can also be useful for recent divorcees or migrants, casual workers and anyone who doesn’t have evidence that they can service their borrowings.

Non-conforming loans are targeted at people with impaired credit ratings. Cannex’s director of research, Kathlene Jones, says these lenders require borrowers to provide full documentation, and a loan may be offered at an interest rate that reflects the risks involved.

Jones says the lines between the two types of loans can be fuzzy and some lenders offer both.

However, low-documentation loans are more common. She says the main players in the market are Liberty Financial, Pepper Home Loans, and Bluestone Mortgages.

How do I get one of these loans?
They are mostly done through mortgage brokers, although the level of direct business is growing. If you are applying for a low-documentation loan, says Gruen, you’ll still need to fill out an application form. But instead of having to provide tax returns and other evidence of income, you may simply have to sign a statement swearing that your income is what you say it is, or provide a letter from your accountant.

In some cases, you may also have to provide recent bank statements. Applying for a nonconforming loan is like applying for a normal home loan as the lender will have to assess your credit risk to decide whether you can afford to repay the loan.

If you’re buying a home, says Gruen, the lender is still required to ensure you can afford to service your borrowings no matter what sort of loan you take out.

Are they more expensive than standard home loans?
Yes. Jones says rates vary, depending on your credit risk, the loan offered and the loan-tovaluation ratio. As a guide, she says, lowdocumentation loans typically have rates from 7.2 to 8 per cent, while rates on credit-impaired loans can go as high as 10.95 per cent.

Gruen says Peach has arrangements with lowdocumentation lenders who offer standard retail interest rates for borrowers wanting to borrow less than 60 per cent of the property’s value. But if you want to borrow from 60 to 80 per cent, the rate is 6.55 to 7.25 per cent, and if you want to borrow more than 80 per cent, you could pay 8.5 to 9 per cent or more.

Gruen says application fees can also be higher on non-conforming loans and can be as high as 1 per cent or more of the purchase price – plus legals.

These fees are often payable in advance.

Part of the reason for the big fees is that the lenders often pay big commissions to the mortgage brokers who sell them.

So Gruen says you should be aware of this and investigate cheaper alternatives first. Jones says these loans can also carry hefty early repayment fees, especially in the first couple of years. This is because after two years of servicing your loan you should become eligible for an ordinary, cheaper home loan – so there’s a big incentive to refinance.

She says some lenders are now structuring their products to remove this incentive by reducing the interest rate each year that you stay in the loan, or automatically converting it to a standard variable loan after two years. Jones says borrowers should make sure they understand all the fees and penalties before signing up. And if a normal home loan is a possibility, says Gruen, investigate that first.

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