Embracing alt doc

Once known for their complexity and questionable reputation, alt-doc loans have undergone an image overhaul of late, becoming the ideal product for many self-employed Australians, writes Nicola Middlemiss. 

As the gig economy continues to flourish, many Australians are choosing to abandon traditional modes of employment in favour of more flexible working options that suit their individual needs.

In fact, data from the ABS shows that the number of independent contractors surged from 986,000 in 2013 (8.5% of the workforce) to 1,310,000 in 2015 (11.2%) – the highest rate since ABS records began in 1978.

However, independent contractors are just a portion of the much larger, self-employed workforce and, according to advocacy group Civil Society, around 2.4 million people across the country now identify as self-employed.

Despite this growing demographic, many self-employed Australians are still unfairly disadvantaged when it comes to securing finance as the big banks continue to narrow their spectrum for lending and buckle down on income and expense verification.

“The reality is that self-employed customers don’t always tick all the boxes of the banks, nor can they satisfy the standard income policies that haven’t been reviewed for some time,” says Aaron Milburn, director of sales and distribution at Pepper Money.

The gravity of the situation was highlighted in a 2017 survey by Pepper, which found that 26% of rejected loan applications were filed on behalf of selfemployed individuals.

The same study also uncovered a glaring lack of consumer awareness, with more than half of all unsuccessful applicants oblivious to alternative options in the market.

“Brokers need to play a role in not only educating these customers but helping them achieve their goals,” Milburn told MPA, pointing to alt-doc loans as the ideal solution.

Sometimes referred to as low doc or lite doc, alt-doc loans are best suited to borrowers who can’t provide sufficient documentation to traditional lenders – such as those who have been self-employed for less than two years or whose tax returns aren’t up to date.

“The reality is that self-employed customers don’t always tick all the boxes of the banks” Aaron Milburn, Pepper

Depending on the category of alt-doc loan, a variety of alternative documentation can be used to guarantee a borrower’s ability to repay a loan, including business bank statements, business activity statements and an accountant’s letter.

“Often this type of documentation is more reflective of the current state of a business, and over time has proven to be more accurate than 18-month-old tax returns,” Milburn says.

Despite the convenience and flexibility they afford borrowers, alt-doc loans aren’t exactly renowned for their squeaky-clean reputation and have even been vilified in the mainstream press in the past. As a result, some brokers remain reluctant to offer this option to their clients.

However, Daniel Carde, general manager of third party distribution at Homeloans, says this is an outdated mode of thinking that could easily undermine a broker’s longevity and value proposition.

From left to right: Aaron Milburn, Pepper; Royden D'Vaz, Bluestone; Cory Bannister, La Trobe Financial

“One of the biggest misconceptions around alt-doc loans is that they are in some way a contravention of brokers’ responsible lending obligations,” says Carde.

“This is not the case. The regulatory guides provide more than adequate guidance in terms of what documentation is acceptable to verify the income of self-employed borrowers,” he continues.

“Ultimately, it is up to the broker to make reasonable enquiries of the borrower and then seek documentary evidence to support the information provided.”

Royden D’Vaz, national head of sales and marketing at Bluestone Mortgages, says another misconception lies in the belief that alt-doc loans are complex and convoluted.

“Many brokers still believe that alt-doc loans are too difficult,” he says. “However, the borrower information required, whether for a prime or a non-bank loan, is standard across the industry.”

While self-employed borrowers or those on varied incomes may be shunned by the banks, D’Vaz says it’s a demographic that savvy brokers simply can’t afford to ignore.

“It’s imperative that brokers recognise the changing lending landscape and actively embrace a diverse cross-section of borrowers to remain viable in a highly competitive market,” he says.

This diverse landscape, he told MPA, also includes credit-impaired borrowers, those with defaults, mortgage arrears or court judgments, as well as borrowers with discharged bankruptcies.

“We encourage brokers to embrace borrowers in need of an alt-doc loan, as this rapidly evolving group represents a significant opportunity,” he says.

“We encourage brokers to embrace borrowers in need of an alt-doc loan, as this rapidly evolving group represents a signifi cant opportunity” - Royden D’Vaz, Bluestone

“Providing superior service and the ability to say yes more often bolsters volumes, increases the bottom line and deepens relationships,” he explains. “When provided with a workable solution, alt-doc borrowers often become some of a broker’s biggest advocates and tend to both stay loyal and readily refer potential clients.”

Cory Bannister, chief lending officer at La Trobe Financial, agrees that brokers would be missing out on a huge opportunity if they failed to meet the demands of self-employed consumers.

“With one third of the private sector workforce being self-employed and growing as more and more people are beginning to operate online businesses outside their normal day jobs, the number of future opportunities in this area is likely to increase,” he says.

“The self-employed are also a good client type for cross-selling opportunities, particularly for leasing, insurance and equipment finance products, and often they are much ‘stickier’ clients with more regular finance needs as their business needs regularly change.”

Regardless of how they may once have been perceived, it seems alt-doc loans are gradually shedding their controversial reputation as they increasingly meet the demands of a notoriously underserved market. Brokers who are unable to adjust their thinking may soon find themselves left behind.