WHAT ARE THE 5 C’S OF CREDIT- ONE OF THE ESSENTIAL QUESTIONS TO ASK YOUR MORTGAGE BROKER

February 5, 2022 By: Nfinity Financials0 comments

It’s critical to feel comfortable with a mortgage broker before you talk with them for the first time about your mortgage needs. Moreover, you are well aware of the QUESTIONS TO ASK YOUR MORTGAGE BROKER.

Best mortgage broker in Australia know for a fact that a home buyer is always on the lookout for ways that would improve their credit rating in order to increase their chances of getting a home loan. However, credit scores are not the only thing that financial institutions, lenders and banks evaluate before approving a home loan. Usually banks and other forms of lenders follow a framework called the 5 c’s of credit in order to access a loan applicant’s creditworthiness. A good mortgage broker will make sure to tell that the 5 c’s determines whether the lender can trust the borrower to pay off the full loan amount based on five characteristics that reveal their financial situation.

The 5C’s of credit

• Capacity: Assesses how much money can be borrowed and repaid.
• Capital: Measurement based on how much money the borrower will contribute.
• Character: Assesses whether the borrower can be trusted to pay back their debt.
• Collateral: Serves as insurance for the lender.
• Conditions: Determines how well a borrower can manage in changing economic conditions.

Here’s what each category means for a home loan applicants creditworthiness which should also be on your list of questions to ask your mortgage broker.

CAPACITY

Capacity refers to how much a loan applicant can practically borrow based on factors such as income, expenses, existing debts and debt-to-income ratio where debt-to-income ratio is the total of all expected monthly debt repayments (including interest) divided by your monthly pre-tax income. This gives creditors an idea of whether the loan applicant can consistently meet loan payments regularly or they may have trouble meeting their obligation.

Lenders may look into the borrower’s net worth and personal credit history to find out if they have other outstanding debt obligations. The information they gather may determine whether they have enough spare money to repay the new loan. A business owner, on the other hand, may be measured according to their business’s working capital, cash flow statements and credit rating. The best mortgage brokers in Australia will make sure to guide you through this process and tell you the areas of opportunities.

CAPITAL

Lenders may also assess a loan applicant’s creditworthiness based on the borrower’s confidence on their intended purchase for the loan. A good mortgage broker in this case will inform you that by “confidence”, lenders mean the borrower’s certainty with regard to the asset they will purchase using the borrowed money. Lenders measure this based on the amount of the personal money that the borrower is willing to put towards the purchase.

This money also refers to the “deposit” for the loan. However, this doesn’t mean that a borrower’s loan application would automatically get rejected if they don’t spare a large capital. The lender would still look at the other four C’s, among other things, before making a decision.

CHARACTER

Character is all about how financially responsible and credible the debtor is perceived by the lender based on the borrower’s management of past and current financial commitments. Good mortgage brokers consider this good news as “character” is largely based on the borrower’s actions. If lenders see that a borrower has been financially responsible with managing finances and personal credit, including debt services, the chances of getting a loan approved may increase. On the other hand, an applicant who doesn’t have a track record of consistently paying their debts on time, such as with credit card debts, or one who has filed for bankruptcy may be rejected. 

COLLATERAL

Collateral refers to the security that the borrower can offer to the lender as insurance in case they default on the loan. In a worst-case scenario, the lender has the right to take the pledged asset and sell it so they can recover the amount that is owed. The collateral may be the asset purchased with the borrowed money or other personal assets that the lender would accept, such as the borrower’s house, car or valuable collectables. Business owners may also offer their business property, equipment or inventory. It is because of these reasons that collateral is among the good questions to ask your mortgage broker as they can help identify what can be offered as collateral.

CONDITIONS

Conditions refer to the terms of the loan and the current economic conditions. Lenders take into consideration the amount of money that is being borrowed, the duration of the loan and what the loan will be used for. Loans for a specific purpose, such as a home loan or car loan, typically have a better chance at approval than a generic personal loan. The loan’s purpose, along with the terms of borrowing, such as the principal amount, interest rate and duration, helps lenders estimate the borrower’s need or financial circumstance.

It’s not that one type of need is greater than another. Rather, lenders tend to be more relaxed with approving loans when the borrower doesn’t have a great need to take on debt to meet their needs. To make its assessment more objective, lenders also consider the current economic conditions vis-á-vis the loan conditions and purpose applied for. This gives them an idea of how consistent the borrower’s repayments would be if economic conditions change, such as when interest rates move, inflation increases or the economy experiences a downturn.

The 5 C’s of credit are taken as a group and cannot be assessed on their own. While some might argue that capital is the most important (since you need a deposit for your home loan), having a large deposit does not guarantee your application will be approved. Capital may be the first thing a lender checks, but the other 4 C’s will also be considered to assess your risk profile. In a way you can mitigate a weakness in one of your 5 C’s with strength in the others. A good mortgage broker will always be able to help do just that.

For more information and understanding on how to use the 5 c’s of credit to your advantage or know more about other such questions to ask your mortgage broker, feel free to contact our expert mortgage brokers at Nfinity financials on the phone number 61 456 456 267.