When applying for a home loan, there are many factors that lenders need to consider before deciding to either approve or decline your application. This is often based on a detailed risk assessment, also known as the 5 C’s of Lending. We are here to help you navigate the lending market and understand why these C’s are so important when assessing suitability for a loan.
Capacity refers to the borrower’s ability to repay the loan. Lenders usually determine this by looking at your employment history, income and financial obligations. These are essential indicators in determining whether you will be able to repay your proposed loan as well as maintain your existing financial commitments. Factors that will be considered include employment stability, income amount, and type of income (e.g. full time, part time, casual, shift work).
Collateral is any property that can be used as security for the loan. This gives the lender assurance that if you do default on your obligations under the loan, there is an asset of sufficient value that can be re-possessed by the lender to cover the outstanding debt.
When lenders assess character, they are looking at your credit history and whether you have a good record of paying your bills in full and on time. A prospective lender will obtain (with your authority) a credit report from one of the major credit agencies which will provide information regarding your past debts, your conduct on those debts and whether you have been subject to any previous defaults or bankruptcies. Lenders use this information to evaluate how your likelihood of repaying the loan in full.
Lenders also consider any capital that you as the borrower put toward the potential investment. By capital, they mean deposit. Lenders take the view that the larger the contribution you put towards the proposed purchase from your own saved funds, the less the likelihood of default. In addition, a larger deposit means that the loan is smaller in comparison to the value of the security property, which means that in circumstances where you do default, the value of the security is going to exceed the value of the outstanding loan.
Finally, conditions refer to your financial conditions that exist at the time that you submit your application. This may include general market conditions, your interest rate and principal amount. These conditions act as indicators of any outside situations that may affect your ability to repay your loan later down the track.
Your chance of success in obtaining a loan depends largely upon how the lenders assess you in each of these areas. Now that you are aware of the 5 C’s of lending, you can better prepare for when you are next applying for a loan to ensure you can answer the questions effectively.
If you are thinking of borrowing and what to know more about how you can seek finance approval or know more about how the 5 C’s could affect your capacity to borrow, speak to one of our experience brokers today.