Learn about the 5 Cs of Credit
When you think about it, home loans are not cheap. Even a tiny block of land worth $150K purchased of borrowed money is a large amount of money to be borrowing. From the lender’s perspective, there is every reason to ascertain the prospective borrower’s financial credibility and general ethic before trusting them to repay back such large sums of money.
From the borrower’s perspective, the process can be quite tedious and at times frustrating that one has to undergo so many arbitrary checks and balances before the loan is approved. Since this is something SwitchMyLoan empathises with, we have prepared a list of 5 Cs that help you better prepare in the lead up to a home loan application.
1. Character is the first thing a bank will look at because it is the very thing that determines your willingness to pay back the loan. It’s not so much that banks are inherently mistrustful of all borrowers. Character checks are largely necessary because while you might be the most trustworthy person there is, unless the bank has had prior acquaintance with you it has no way of knowing this. So it makes sense that the bank will check your credit history and determine whether you have had any defaults on past loans or if there were any other compliance issues with other lenders that entrusted you to a loan. Provided that you are confident there are no blemishes in your track record, there is no reason to fear the character check.
2. Capacity checks are equally necessary once a character check has been conducted because that is what determines your ability to make on time repayments. The key factor to be assessed will be how much you earn followed by how long you have held your job. The more you earn and the longer you have held your job will no doubt aid your cause. If you happen to be self-employed, then your capacity will be assessed on the basis of the evidence of your taxable income.
3. Commitment is the bank’s assessment of both your character and capacity. Once the two have been considered, the bank will then assess your ability to commit to home loan repayments. An existing track record of prompt repayment of past loans, bills or council rates can all serve as evidence to give the bank the assurance that you are someone who will make a firm commitment to your loan repayments.
4. Capital essentially means the wealth that you possess, any assets you hold and any valuable possessions that could add to your net worth. Capital assessments embellish your credibility as your capital is viewed as further evidence of your financial stability. In the event that you happen to lose your on-going source of income and are struggling to make repayments, your capital can be seen as security as an insurance for the bank.
5. Condition is the factor that takes into account any potential economic downturns and the impact they may have on your ability to make repayments. The trends in the property and finance industry nationally, the health of the global financial market, economic recessions, the political landscape and international trade and diplomatic factors all come into play. Condition is the factor that is beyond anybody’s control and for that very reason, does not play as significant a role in assessing a borrower’s credit eligibility as the other factors.
Call us on 1300 307 155 and speak to one of our Customer Service Specialists to get a free quote!
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