The 5 Cs of credit
When seeking finance to purchase a property, it can help to understand the 5 C’s of credit and how they can impact your success in securing finance for your property.
Below we’ll explain the 5 Cs:
Character
This refers to your reputation, and is mostly captured via your credit score. There are 3 main companies that monitor your credit score and you can obtain a copy via their websites:
· equifax.com.au/personal/help-centre/credit-reports
· creditcheck.illion.com.au
· experian.com.au/consumer/order-credit-report
A credit report will provide an overall credit score, the higher the number, the better your credit history. A very good score is 740 to 799 and 800 to 850 is excellent. A score of 300 – 579 is poor.
It will capture all your financial history, what financial accounts you have had, and if you have missed any payments. Therefore, when you are applying for a loan, you must disclose all accounts that are currently open. Otherwise, the lender may not approve your loan.
Having a poor credit history doesn’t mean you cannot get a home loan. There are lenders who are willing to accept a higher risk, although they will charge higher rates. And even if you have missed payments or defaulted in the past, if you have shown good conduct over the last 2 years, then that will be taken into account.
Capacity
This refers to your ability to repay the loan. It is dependent on what your total income is, how many existing debts and repayments you have and what your monthly expenses are. By taking all this into account, the lender will calculate how much surplus income you have and your ability to service any new debt.
Capital
This is the amount that you can contribute to the loan yourself. The more you can contribute, the less you will need to borrow and the lower your interest rate will be.
Collateral
This is the security used guarantee the loan will be repaid. When you are buying a home, this will be the property you are purchasing. To ensure that the amount you are paying for the property is not unreasonable, a lender will order an independent valuation. Some lenders will only provide up to 95% of the value of the home, just to ensure their costs are covered if they need to sell it to recover outstanding debt. Other lenders will only go to 80%.
Conditions
These are the details of the loan. The interest rate, loan term, repayments and loan amount, and any other conditions the lender may impose.
Securing finance can feel complicated and stressful. The easiest way to understand your borrowing capacity and lender options is to have us run some simple scenarios for you. I compare over 35 lenders to make sure you’re getting the best rate and conditions possible.
If you want to get started, you can complete our 5 minute form here: https://bit.ly/43VqyrH
Call on: 0418 552 938
Email at: peter.jefferson@mortgagechoice.com.au, or
Book a time to chat: https://bit.ly/43WsXma
If you’re a first home buyer, I’ve also created a useful guide to help you understand other key aspects of buying your first home.