Last Updated: 10th April, 2024

5Cs Of Credit: Do You Stack Up As A Borrower?

Published by Otto Dargan on July 17, 2015

There are many reasons that a bank will decide to either approve or decline a home loan application. Sometimes it seems as if it depends on what kind of mood they’re in!

No matter what though, lenders base their assessment on your worth as a borrower using the so-called ‘5 C’s of Credit’. Applicants who can clear this assessment will have a much better chance of getting approved.

The 5 Cs stand for character, capital, capacity, collateral and conditions but what does that mean for you and your ability to qualify for a home loan?


Character amounts to your willingness to pay back the mortgage. Simply put, lenders consider your personal and business reputation.

The first of the 5 Cs of credit largely involves a look at your credit file. The lender will check to see if you’ve got any blemishes or bad credit red flags such as defaults or bankruptcy in your credit history.

Lenders will also consider your stability as a borrower, specifically, how long you’ve been in your current job, how often you’ve changed addresses in the past couple of years and if you’ve been paying your bills regularly or not.

If you don’t have a great credit history then you may be able to qualify for a bad credit home loan with a specialist lender instead or try again after seeing a specialist that can help you repair your credit file.

It’s important to speak to a specialist mortgage broker if you’re in a situation like this so please complete our free assessment form and we’ll let you know if we can help you.

What if you need a commercial loan?

Getting a business loan is a little different to a standard residential home loan. Apart from your personal situation, the lender will consider your experience and track record in your business and industry to evaluate how trustworthy you are.

If you can show proof to the bank that you’re honest, that you keep your promises and will pay your debts on time then you’ll have a good chance of getting approved.


The second of the 5 Cs is capital and it represents the amount of wealth that you possess and includes any assets or valuables that make up your total net worth. In short, it’s the value of your assets minus your liabilities.

You can estimate your capital by deducting how much you owe from how much you own.

For example, your savings, the value of your car, any real estate you already own and investments, such as shares, minus any personal loans, HECS/HELP or credit card debts.

In the event of a financial setback like losing your job, banks like to see that you have a safety-cushion for repaying your home loan.

By looking at capital, banks also get an idea of your ability and willingness to save and accumulate assets. Unless you’re fairly young, a lack of accumulated assets raises a red flag to the bank that you’re probably not that good with your money.

For example, a 50-year old couple have $20,000 in savings and they want to borrow $500,000 to buy a house. Most lenders will take one look at their application and send them packing.


It’s because lenders expect more from of a 50-year old couple in terms of their asset position.

They don’t want someone as old as them to have no assets, investment properties or at least a business. This is how capacity comes into play when taking out a home loan.

If you’re taking out a commercial loan, lenders will also consider the amount of money you’ve put into your business.


Continuing the 5 Cs of credit, lenders use capacity to get an idea of your ability and your means of repaying the loan.

Essentially, banks work this out with a debt-to-income or ‘servicing’ ratio based on how much you earn compared to your level of debt. Think of it as your incomings versus your outgoings.

Your incomings refer to your income, rental income or anything else you earn from investments you have. Your outgoings refer to things like your rent, bills and debts such as loans and credit cards.

A debt-to-income ratio of less than 1.00 indicates that you don’t earn enough to support a mortgage.

Banks prefer a servicing ratio of more than 1.00 although it can range from as low as 1.10 to as high as 1.35 to ensure a sufficient cashflow to cover mortgage payments on an ongoing basis.

Something to keep in mind with credit cards is that it doesn’t matter if you never max it out, banks will assess your application as if you’re using the credit card to its limit.

For example, if you only spend $1,200 a month using your credit card but have a $2,000 limit, banks will assess you as if you’re spending an extra $800 a month.

The trick?

Decrease your credit card limit to what you actually spend! Even Queen Elizabeth II would find it difficult to get a home loan because of her capacity.

For those that don’t have royal blood, let’s assume you’re a 27-year old with an annual salary of $150,000 of which you spend $7,000 a month; you’ve got 2 credit cards, one with a $5,000 limit, and you’ve saved up a $100,000 deposit. You want to buy a property worth $800k to $900k.

Will the banks lend to you?

You’ve got a high probability of getting your loan application approved because you’ve got a very good income to support the loan payments and a servicing ratio of well over 1.00.

Of course, this is just general information – lenders consider other aspects of your situation before approving you for a home loan.


Collateral is the property that’s used to secure the loan. It can be a building, including your home, or equipment owned by your business or by you, personally. Typically, it should be equal to or greater than the size of the home loan.

If you’re unable to make your mortgage payments as agreed, the bank has the right to seize your property to repay the debt although other avenues are explored before going down this path, including reducing or freezing your home loan repayments for period of time.

If they do sell your property, you will hold onto any capital gains from the sale.

If you can’t provide collateral or security in the form of property, a number of lenders offer guarantor loans.

They work the same as a standard home loan except your loan is secured by your parents’ home. Best of all, you can borrow the full amount of your property plus the costs of completing the purchase (stamp duty and other legal fees).

That means you don’t need a deposit and you can avoid the cost of Lenders Mortgage Insurance (LMI), a one off fee normally charged when borrowing more than 80% of the purchase price.


The last of the 5 Cs of credit is known as conditions and it refers to the financial conditions that exist at the time that you submit your application, specifically, your interest rate, principal amount and general market conditions.

It basically refers to any outside events or circumstances that may affect your financial situation and ability to make home loan repayments.

If you’re taking out a commercial loan, the lender may evaluate local economic conditions and the overall business climate, both within your industry and in associated industries that could affect your business.

As part of conditions, the lender will also ask the borrower what the purpose of the loan is.

It hasn’t been long since the RBA cash rate dropped to an all-time low of 2.00%. This has increased the borrowing capacity of home buyers. Also, due to the recent policy changes in Australia, most banks and lenders have reduced the amount investors can borrow.

Because of these conditions, home buyers can borrow more whereas many lenders allow investors to borrow only up to 80% of the property value at the moment.

Discover how you can meet the 5 Cs of Credit and get your home loan application approved!

Fill in our free assessment form or call 1300 889 743 and speak with one of our mortgage brokers.

We’re experienced credit specialists who can help you build a strong case so you have the best chance of getting approved the first time around.