The Five Cs of Credit


The mortgage process can sometimes be a little confusing or overwhelming. In addition to your personal finances, mortgage rules and lender guidelines are always changing.  However, focusing on the five Cs of credit can help. There are five key areas that are reviewed with a credit application, and they have become known as the five Cs of credit.

What Are Five Cs of Credit?

The five Cs of credit is a common framework used by lenders and financial institutions to evaluate the creditworthiness of borrowers. These five factors help lenders assess the risk associated with lending money to you, which determines whether you receive mortgage approval.

1. Character

This focuses on you personally and if you are able to manage the loan. It takes into account the other four Cs of credit in relation to you. Lenders look at stability, such as how long you lived at your previous residencies, how strong you are at saving money, how you manage your current debts, whether you are able to stay with one employer for a longer duration of time and so on.

2. Capital

Capital is the next of the five Cs of credit. This encompasses your savings—specifically, the savings you have for the down payment and closing costs. Most lenders will want to see that you have money for your down payment, closing costs, and emergency funds. 

Learn more: Down Payment on a House Ottawa
Learn more: Closing Costs to Consider When Purchasing a Home

3. Capacity

Capacity is about income and debt servicing. Do you have enough income to cover the mortgage payment and other real estate items such as heat, property taxes, and other obligations? One way to determine your capacity is to review your debt-to-income ratios. As your mortgage broker, I can assess this with you when completing your mortgage application. 

Learn more: Mortgage Brokers in Ottawa

4. Collateral

This is the property. The lender is looking to see the quality of the property that will be used as the security of the loan and if it meets their standards and guidelines.

5. Conditions

Conditions refer to the specific terms of the loan and the overall economy and market. Lenders consider factors such as the purpose of the loan, interest rates, loan duration, and external environments when making lending decisions.

How to Improve Your Five Cs of Credit

Building and maintaining a strong credit profile is essential for obtaining a mortgage. To improve your five Cs of credit and enhance your overall creditworthiness, consider the following strategies:

1. Improving Character

To improve this C, try to pay your bills on time. Consistently making payments is one of the best ways to build good character. To help you stay on top of payment schedules, consider setting up automatic withdrawals or reminders. You can also regularly review your credit report to spot any errors or inaccuracies that may negatively impact your character. If necessary, dispute and rectify any discrepancies as soon as possible.

2. Improving Capital

To enhance capital, plan to save for a down payment ahead of time. A larger down payment demonstrates commitment and reduces the lender’s risk. Additionally, strategically growing your personal investments increases your net worth over time, which showcases your financial stability.

3. Improving Capacity

The best way to improve capacity is to improve your debt-to-income ratio. You can do this in two ways:

  • Lower your debt-to-income ratio by paying down existing debts. Focus on high-interest debts first to free up more of your income.
  • Explore opportunities to increase your income, such as taking on another job, freelancing, or investing in courses to boost your earning potential. 

4. Improving Collateral

If you already own property that could be used as collateral, keep it in good condition. A well-maintained property is more likely to be accepted as collateral for a mortgage. If possible, consider also offering multiple assets as collateral, such as a combination of cash savings and existing property, to provide flexibility to the lender.

5. Improving Conditions

Conditions are often out of the borrower’s control. Generally, it’s important to stay informed about the economic environment that affects your ability to repay loans. Based on this information, ensure you’re ready to take on a mortgage, as these same circumstances will be factored into your lender’s decision.

The goal of approval is to have all the five Cs meet the lender’s criteria. Knowing more about what a lender is looking for when reviewing an application is a great start in getting on the right track for owning a home.

To learn more about how to meet the criteria for all five Cs, reach out to me today!

Learn more: Mortgage Pre-Approval Ottawa

andrew thake about

About Andrew Thake

Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.

Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.

Why not make your mortgage experience a comfortable one?

Book an Appointment