The #1 factor determining your ability to obtain advertised mortgage rates, like the ones on Ratehub.ca, is your credit score. Unless you are self-employed or applying for a mortgage on an investment property, it’s the primary factor that determines whether you can get the best rate available for the mortgage you want.
What is a credit score?
There are two companies in Canada that keep track of your credit: TransUnion and Equifax. When you borrow money in the form of a credit card, bank loan, car loan, mortgage or line of credit, the lender reports to these companies about how much you’ve borrowed and whether you’ve made your payments on time. Your ability to borrow within your means and make payments on time is measured in a credit score ranging from 300-900, higher being better.
Why is my credit score important for getting a mortgage?
The average house price in Canada was $525,125 as of October 2019. To buy a home for that amount, you may need to borrow as much as $517,516 – and no lender is going to give you that much money unless you’ve demonstrated a good history of managing your money. In addition to judging the security of your employment, the lender will look to your credit score as a signal of whether you’re likely to be able to make your monthly payments.
To understand how your credit score will impact your mortgage rate, consider using a mortgage payment calculator to see how a few percentage points can make a big difference in the amount of money you’ll pay every month.
How does my credit score impact my mortgage rate?
Generally speaking, the best mortgage rates are available to everyone who meets all the lender’s criteria and has a credit score of 680 or higher. It doesn’t really matter whether your score is 681 or 890, as long as you’re within that range you can qualify for the lowest mortgage rates.
Some borrowers with a score between 600-679 may still receive approval. But, some lenders may have more stringent criteria and could reject the application. For example, you may be required to make a larger down payment or asked to purchase mortgage default insurance, which protects the lender in the event you default on the mortgage. You may also pay a slight interest rate premium over the lowest rates.
If your score is below 600, your mortgage pre-approval may not pass with a top-tier lender or with a favourable mortgage rate. Companies known as “b-lenders” may lend to you if you have bad credit, but you will pay a much higher interest rate for the privilege. For example, you may be able to get a mortgage with a company like Home Trust for a premium of about 2% higher than someone with good credit might get from a bank. There are also private lenders who will loan mortgage funds to people with bad credit for rates of 10% or higher.
You can use our mortgage affordability calculator to understand how much you can afford based on your credit score.
What affects my credit score?
There are five different categories that go into a credit score: on-time record of payment, the number of inquiries or applications for credit, credit utilization, credit history, and credit “depth”.
Dara Fahy, a mortgage broker in British Columbia, says “although it sounds like common sense, the most frequent reason that a person’s credit score is lower (or outright bad) is that they missed one or two payments.” A missed payment is a missed payment, regardless if it’s a $15 minimum payment on a credit card or a $500 car payment. Few borrowers realize the effect is the same.
Also, you shouldn’t be applying for credit you don’t need. Store credit cards are prime culprits driving excessive credit inquiries. Is the retail discount worth it? Well, the more times your credit is under review, the lower your score.
Your credit utilization ratio – your balance divided by available credit – is also a major factor. Contrary to popular belief, it’s not based on your balance at the end of the month but your balance outstanding at any given moment in time. Fahy recommends keeping the utilization under 80%, if you want to safeguard your score.
The last factors are long-term credit history and what Fahy calls the “depth” of your credit. In this he is referring to someone who has just one credit card versus someone who also has a line of credit and, say, a mortgage. Having a few accounts, of varying types, is good. However, too much credit means that you could, theoretically, get into trouble if you used all available credit facilities. In this case, too much credit can mean a lower credit score and difficulties getting mortgage approval. That’s not to say you should go and cancel all the credit cards you don’t use, however. Having long-lived open credit accounts helps your score too, so maintaining an old credit card can help your score even if you don’t use it.
How can I improve my credit score?
The best way to improve your credit score is to use credit responsibly. That means borrowing only what you need and making your minimum payments on time every month.
Unfortunately, there’s no magic bullet that will improve your credit score overnight. The process can take a long time, and certain marks on your record (especially if you’ve been bankrupt or filed a consumer proposal) can take a long time to resolve.
Want a better mortgage rate?
I’ve never had a credit card or loan. How can I get a mortgage with no credit?
You wouldn’t lend $100 to someone you’ve never met on their promise to pay it back. Nor would you lend it to a friend who has a history of borrowing books from you and never bringing them back. But you might give $100 to a friend who is good about returning what they borrow. Similarly, mortgage lenders won’t lend to you unless they have some precedent that you’ll pay back the money they lend to you.
Starting a credit file can take work, especially as an adult. If you’re in any kind post-secondary education, you can apply for a student credit card to start building credit. As an adult, you may need to start with a secured credit card, which requires a refundable deposit and will allow you to demonstrate good borrowing habits.
What can I do to ensure I’ll receive mortgage approval?
There are a few steps you can take to improve your chances of mortgage approval, although there’s no guarantee.
First, check your credit score as soon as you know you’ll be shopping for a mortgage – even if you’ve just started saving for a purchase you plan to make in a few years. If your credit needs work, this affords you time to make improvements. If your credit is good, you can plan with confidence.
In addition to your credit score, make plans to stabilize your employment and income. Lenders will favour borrowers who have steady employment history so don’t change jobs right before you plan to buy a home, especially if you’re a first-time homebuyer. If you’re self-employed, you’ll likely need a few years of income flow for pre-qualification.
Finally, contact a mortgage broker and ask to get pre-qualified for a mortgage. Pre-qualification is an informal process in which the broker will look at your income, expenses, and debts and give you a well-informed estimate of how much home you can afford to buy. Take this step early so you have time to adjust and improve your credit score for a better chance of approval.
How do I find out what my credit score is?
There are a few ways to get your credit score. You can go to Equifax and/or TransUnion directly and request a copy of your report, or click here to get a free credit report from Ratehub.ca. These detailed reports allow you to review them ensuring there are no errors or omissions. They can also be expensive. Equifax offers free credit reports if you make a request by mail but charges $11.95 plus tax to give you your credit score. Equifax also offers an online subscription product for $19.95 per month. TransUnion allows you to download a consumer disclosure online but won’t give up your score without a monthly subscription of $19.95 per month.
There are also a few companies in Canada that allow you to check your credit score online for free, including RateHub. However, these services require you to make an account and use the information in your credit score to help make it easier for you to access loans and credit cards.
The Bottom Line
If you haven’t built up your credit, or need to improve your credit – pay off your bills on time, every time. Your mortgage application with a quality credit score will have positive impacts on getting better rates.