The 5 C’s of Lending – The Secret to Getting Your Mortgage Application Approved

There are many aspects to a Home Loan Application that financial institutions consider when assessing whether to approve or decline the application. Primarily the success or failure of an application will come down to the applicant’s ability to overcome the 5 C’s of credit: Character, Collateral, Capacity, Capital and Conditions. So what are these C’s and how do they impact on your ability to get a Home Loan.


The first C of Character is based on your willingness to repay your mortgage. Lenders will refer to your credit history when determining whether you have a proven track record of repaying any previous credit facilities on time, or have operated a continuous credit line such as a credit card within the terms of the facility. Any issues identified on your credit history, such as payment defaults or bankruptcy, may immediately see your application fail this test and therefore it is declined.

Other aspects of the Character test that are considered are:

  • The applicant’s employment stability.
  • Does the applicant change address regularly?
  • Are bill payments made on time?

If your credit history is not great it does not mean you are unable to get a Home Loan. You may need to consider looking at non-conforming Home Loans, which are available for applicants who may not overcome the Character test when applied to credit.


Capital is the second C and represents the applicant’s net worth, the value of your assets minus the liabilities. Effectively the lender will look at personal assets like cars, savings in your bank accounts, investments such as shares and any property that you own, and deduct things like credit cards, personal loans and any other loans or credit facilities you have at the time of submitting the application. The value left is your net worth.

The lender considers this as it demonstrates an applicant’s ability to accumulate assets. It works in conjunction with the first C, Character, as the willingness to repay debt should assist improve an applicant’s net worth.

An applicant’s life stage will also influence whether an applicant passes the Capital test. A young applicant would not be expected to have accumulated as many assets when compared to a middle-aged applicant. Where an older applicant does not have a significant net worth it may indicate that they spend too much and haven’t allocated any money into savings or buying other assets. Most lenders will decline an application where the applicant’s net worth is below what is expected of someone of their age.


Lenders use the third C of credit, Capacity, to determine an applicant’s ability to repay the proposed debt. They measure this by calculating all forms of income an applicant receives (salary, rental from investment properties, share dividends, some Government pensions) and compares this to the loan repayments or commitments an applicant currently has, including any living expenses, credit card limits, personal loans or other loans.

Should there be enough income left over after deducting these repayments to meet the proposed repayment on the Home Loan requested, then Capacity has been met. Please note that Banks will use a default interest rate, usually a margin of 2.5% above the advertised interest rate,  when completing Capacity calculations as they like to see that the applicant will be able to meet the repayments should interest rates go up.


Collateral refers to the property that is used to secure the loan. For a Home Loan this is the property that you will be purchasing or, for a refinance, a property you already own. Typically, the value of the security should be greater than the size of the home loan requested.

The fourth C is very critical to the success of your loan application as the lender must hold adequate security to ensure their risk of lending to you is mitigated. If you’re unable to make your mortgage payments as agreed, the bank has the right to seize your property to repay the debt after all other avenues have been explored. There needs to be sufficient value in the Collateral offered to clear the debt in full should this situation occur.

There are other options available should you be unable to meet the Collateral requirements, such as guarantor loans, that you may be able to consider.


The final C is the one that can be the most challenging to meet as it is sometimes out of the applicant’s control. Conditions refers to the general market conditions that are present at the time you apply for the loan, such as the current interest rates available, perceived employment security and other events that may impact on your ability to meet the proposed loan repayments. This is particularly pertinent to the current situation we have for those people employed in the hospitality, retail and tourism sectors which have been severely affected by the pandemic.

For example, some lenders have made the decision to remove from consideration any applications for finance which come from anyone employed in these sectors, as their short and medium-term income and employment prospects are potentially bleak. These applicants are seen as too risky for lenders to consider at this time, even if the applicant is currently employed and earning an income.

The purpose of the loan is also an important part of overcoming the Conditions component of the 5 C’s of credit. Buying an investment property is seen as a riskier proposition by some lenders, who have reduced the percentage they would lend for this purpose to 80% of the security value, whereas buying a home for owner-occupation would achieve a loan up to 95% of the security value (subject to mortgage insurance approval of course).

If you are able to pass all of the 5 C’s you should not have difficulty proving you are a credit-worthy prospect and would meet the criteria to have your application approved. However even if you don’t pass all of the 5 C’s there still may be options out there to assist you. Your mortgage broker is best-suited to help you navigate through the market and find the most appropriate solution that meets your needs.

At SHL Finance we are ready and willing to help you achieve your Home Loan finance goals. Please call Reece Droscher on 0478 021 757 to discuss all of your Home Loan needs.

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