The 5 C’s of Home Loans - does Your Application Sparkle?

May 18, 2017
Annette Kennedy

If you have ever purchased a diamond – maybe an engagement ring - you may have discussed the 5 C’s – cut, clarity, colour, carrot and certification.  You considered each of these carefully before investing in your bling!

A Lender will follow a similar thought process, considering how much your ‘creditworthiness’ sparkles before approving a home loan.

Lenders look at 5 C’s to determine your financial creditability as a potential borrower of their funds.

John Kennedy, mortgage broker of Mortgage Choice in Mudgeeraba on the Gold Coast, summarizes these 5 fundamentals of lending.

1. Character

Reviewing a potential borrower’s track record in meeting their financial commitments is an indicator of the level of risk the lender will be taking in loaning funds.

Credit score, detailed credit history and saving records are reviewed and assessed for dishonest, fraudulent or incompetent financial behaviours.

You will be required to sign an authorisation to enable the lender to conduct a credit reference check.  This will be considered an enquiry on your file and this enquiry maybe considered by other lenders if you are shopping around.

Mortgage brokers are able to look into your credit file without leaving an enquiry, prior to a home loan application being lodged.

2. Capacity

This reflects the borrower’s ability to meet the repayments over the term of the loan while considering all other debts and living expenses.

The lender requires detailed documentation of your income and your liabilities.  This may include payslips, tax returns, employment contracts, current loans, credit card statements, child maintenance payments and details of interest, rent and dividends received.

This incomings versus outgoings ratio is known as your home loan serviceability.

 3. Capital

The lenders look at your total net worth of all your assets and liabilities.  This gives the lenders an indication of how you manage your finances.

They consider the money you are going to use as your home loan deposit and how you obtained these funds.  Lenders will consider applications where there is evidence of genuine savings over a period of time.

If you are currently renting your rent repayments maybe considered by some lenders but many lenders do not consider this as a form of genuine savings.

4. Collateral

This is the value of the property which will be used as security for the loan being considered.

In most home loans this will be the property being purchased.  The lender will secure the property with the mortgage (which is a legal term for a claim over a property).

The maths on this consideration is known as the loan to value ratio or the LVR.

A valuation of the property is carried out by an independent registered valuer.  They will confirm the value of the property (which may not be your purchase price) and then the lender will look at the home loan amount being requested in relation to the property valuation.  This number is expressed as a percentage.

If this number is greater than 80% most lenders require you to pay Lenders mortgage insurance –LMI to ensure their investment is secure.

5. Conditions

The last “C” is referring to the lending market on a national and international level. It is the conditions that allow a lender to consider their interest rates and therefore your ability to meet repayments.

Examples are; APRA putting conditions on banks to slow investment lending and the RBA holding the official cash rate at historical lows of 1.5%.

These conditions influence the interest rates of the banks and ultimately your home loan and repayment amounts.


Each lender measures your home loan application’s “sparkle” with their own criteria.

At Mortgage Choice in Mudgeeraba on the Gold Coast we can review your options with over 20 lenders. 

Call our mortgage brokers, today on 5559 2563.

Posted in: Home loans

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