What do the Banks look for when Lending Money?
So you are thinking about actually getting a loan? What is it that the Banks are going to be looking for in terms of being able to lend you money for a mortgage? There’s actually 5Cs that allow them to do that. Character, Capacity, Conditions, Collateral and Common Sense. So let’s explore all five!
The first one is Character. When they are talking about character, they are looking at two things. Character of how have you been in the current home that you’re living in and how long have you been in your current working environment for? The Banks are saying, this is a 30-years loan, if you’re moving from home to home let’s say, 6 times in the last 5 years, they would be thinking; “Really? Are they going to settle down and stay for that long?”. In terms of income, they would be saying, “How long have you been employed for?” That would be your character around employment. How quickly are you moving jobs? Are you going to be able to sustain that job for a long period of time allowing you enough time to pay off that mortgage?
Number 2 is Capacity. Capacity is all about the income that you’re generating and that’s all about servicing the loan. So a lender would use a calculation around your ability to make those repayments and the same calculations will also talk about the borrowing capacity that you are able to achieve. The things are, “Are you employed full time? Are you self employed? Does that income fluctuate up and down? Are you casual? Are you under a probation period?” These are all the things that they are looking for when it comes to capacity.
Now, Conditions. There are lots of lenders out there and lots of lenders have different types of conditions. And that’s their risk tolerance around what sort of comfort they have around lending people money. The conditions might be is, if you’ve only been employed for six months or less or you’re casual or part time, they may not accept your income. The other thing that they may also be looking at is how’s your credit been? Do you have a bad credit history? Do you have a positive credit history? What’s your personal credit file like? Are you able to pay off your loans on a regular basis? Have you been able to demonstrate that? Have you also been able to demonstrate the capacity to save money over time. There are the types of conditions they are looking for.
Then, we look at the Collateral. Collateral is an interesting one. That’s the security. So what is the bank lending you money against? What type of security? Obviously, there are different type of security such as residential zone 1, houses and units. But we also have different types of titles, we have strata, we have stratum, we have company titles and then we have obviously, private treaty or freehold title as well. Tolerance title is another one to consider too. They are important things to understand. So the banks are saying, “Am I happy to lend that type of collateral?”
Finally, Common Sense. Now the common sense approach is about putting all of the conversation together and saying; “Is this a reasonable risk for us to lend the money to this client?” Let me give you an example. If you are a recent arrival and you’ve had 10 years experience in the IT industry form the country that you used to be living in and you’re now living in Australia with your new job in IBM or something like that but you don’t have the long term employment history in the Australian market, they would look back and say, “Well, there’s good common sense here that this is a professional person and we want to lend them the money because we want to build a relationship with them.”
So there’s the five C’s of lending. They are the things that the banks are looking at to consider you and to consider lending you some money.