Often referred to as the cannons of lending: character, capacity (to repay), collateral (security), conditions and capital.
Character
Banks will only lend to people that they consider will repay the debt. They have to make an assessment of character; in other words integrity. Some of the things which will influence the character assessment are:
- Credit checks (whether clean)
- Assets/savings relative to age
- Occupation and stability
- Residency status and stability
- Debt levels and repayment history
- Check of Bank statements-spending patterns
Capacity to repay
This is a test that the lenders apply to satisfy themselves that the borrower can repay the loan that is being applied for. In simple terms they take total monthly NET income and deduct living expenses along with credit commitments. Provided there is a reasonable surplus then they may be happy to approve a loan.
Whilst finance might be approved the borrower needs to be fully aware of the commitment that they are entering into. It would not be unusual for loan repayments to exceed rent that a party might be paying. Of course there is also rates, insurance and maintenance costs to factor in once you own a house.
Collateral
This refers to the mortgage (security over property) that the Bank will hold to secure the loan(s). Ultimately the Bank can sell the property to repay the loan(s) in the event that repayment of the loans have not been made for some time.
Conditions
This refers to economic conditions. A good recent example of how this can impact is the global financial crisis. Early in that crisis Banks tightened up on credit due to market uncertainty. In other words finance was harder to obtain in some cases.
Capital
The amount of deposit or equity of the applicant/borrower. The more a borrower has of their own money in a property the less likely they are to walk away from the obligations.
