What Are the 5 Cs of Credit?

April 5, 2022

Key points:

  • The 5 Cs of credit – capital, character, capacity, collateral, and credit – impact your ability to secure a mortgage 
  • These terms take in your savings, creditworthiness, debt-to-income ratios, assets, and credit scores


If you’re in the market for a mortgage, you will have to take into account where you fall with the 5 Cs of credit. These terms – capital, character, capacity, collateral, and credit – impact your ability to secure a mortgage. Let’s review what each term means.


The first of the 5 Cs of credit, capital is fairly straightforward. This is how much money you have to put towards your mortgage, usually in the form of a down payment. Remember, in Canada your down payment needs to be at least five per cent of your home’s purchase price, but homes over $1 million need a full 20 per cent. Your capital shows a lender what you have to put towards your purchase when you seek a mortgage approval. This likely means you need tens of thousands of dollars for your down payment (at least). Keep in mind that larger down payments can result in better rates and products, plus you avoid having to pay for mortgage default insurance


Capacity is all about your debt-to-income ratios. First, we have your gross debt service (GDS) ratio. This ratio compares your income to your household debts by adding up all your monthly housing costs (mortgage/rent, utilities, taxes, etc.), and dividing it by your income to reach a percentage value. The lower the percentage, the better. The Canada Mortgage and Housing Corporation (CMHC) advises your debt-to-income ratio shouldn’t exceed 39 per cent. 

Your total debt service (TDS) ratio is similar, but it includes all your debts, not just household payments. This ratio must be below 44 per cent for most lenders to approve a mortgage. If your ratios are too high, you will need to work towards reducing your debts. This might mean a stricter budget, or even debt consolidation.


Any valuable asset you have that can help support a lender’s decision to finance your mortgage is collateral. Collateral is an extra layer of reassurance and protection for a lender, in case you can’t make your mortgage payments. When a lender finances your mortgage, they will need to know they aren’t risking a great deal for it. In the event you default on your mortgage, for example, your collateral has the value to make up for it. For a mortgage, your collateral is the value of the property a lender is financing, just like a vehicle could be collateral for a car loan, for example.



Credit, simply put, shows lenders how creditworthy you are. Your credit will impact how much a lender might be willing to finance for your mortgage, and at which interest rates, based on how much of a risk they think you are. Lenders will often look at your credit score to determine your creditworthiness. Credit scores in Canada can range from 300 to 900. The higher your credit score, the more creditworthy you seem. In general, you should aim for a score of at least 660 before applying for a mortgage.


Finally, we arrive at character. The last of the 5 Cs of credit, this factor often draws on all previous terms. This reviews your financial character as a borrower. This means looking at your credit history, debts, current payments, etc. These items give lenders an inside look at how reliable or creditworthy you are in terms of making payments on time and to the full amount. Lenders gain this information through things like your  income, debts, employment, and savings. Your character is a rounded examination of who you are as a borrower.

The 5 Cs of credit will be an important part of your mortgage application. They will show lenders everything they need to know about you, which will heavily influence their decision to finance your mortgage. We recommend keeping your credit score high, lowering your debt levels, and maintaining your income and employment. You can also visit our services page to see how we can help you with your mortgage needs. Finally, I recommend downloading the MCC Home Centre App to gain a better understanding of your mortgage. You can easily examine rates and your purchasing power, get pre-qualified, and check out the refinance analyzer tool.

If you have any questions, feel free to get in touch with me or book a call directly into my calendar below.