The better your credit score, the more room you have to negotiate for the best mortgage rate. Good credit scores in Canada range from 650 to 900 with a score of over 800 being considered to be outstanding. Even if you have a low score, you can often still get a mortgage. Banks like RBC and CIBC have mortgage programs for newcomers to Canada who have a short credit history. B-lenders and private mortgage lenders are more lenient to those with low credit scores, and they can be accessed either directly or through mortgage brokers. These alternative methods usually lead to higher interest rates, however, so it’s often a better idea to focus instead on improving your credit score. Paying your bills on time, using your credit cards responsibly, and building up a good credit history can all increase your credit score.
What is a credit score and why is it important?
Your credit score is calculated from your credit report, which contains details like how much money you’ve borrowed and how successful you’ve been in paying your bills. Your credit score is a number that shows how credit-worthy you are and is calculated from the information in your credit report. A credit report contains details about the length of your credit history, your payment history, and the amount of debt you’re carrying. The two main credit bureaus in Canada are Equifax and TransUnion. Information from your creditors and lenders are stored in your credit report. Your credit score is an indication of how reliable in the past you were at obtaining and using credit and paying it off in a timely and on-schedule fashion.
This information is of great interest to your lender when you apply for a loan, a mortgage, a credit card, or a line of credit. They use your past credit performance to decide what kind of risk there is in lending to you. The higher your credit score – that is, the better you’ve handled credit in the past – the lower the risk of lending you money. This is especially important when you’re applying for a large loan such as a mortgage.
Keep in mind that your credit score, while important, is just one piece of information that lenders use to determine your creditworthiness. Lenders may also look at your credit report, your income and employment history, and any other debts that you have.
What is a good credit score?
In Canada, credit scores range from 300 to 900 with higher scores representing a better score. In general, a score of 600 to 649 is considered to be fair; 650 to 719 is good; 720 to 799 is very good; 800 and more is excellent. There is no one definite number that will ensure that you can get the best mortgage interest rate. Higher scores mean that you have shown responsible credit behaviour in the past, but it does not account for other factors, such as if you are able to comfortably afford your mortgage payments.
In the United States, the credit score range is slightly different. Most lenders use a model that ranges from 300-850 points. Having a credit score of more than 800 is excellent; 740-799 is very good; 670 to 739 is good; 580 to 669 is fair, and lower than 579 is poor.
Even if you have a low credit score, which is generally considered in Canada to be one below 560, you may still be able to get a loan or a mortgage. Private mortgage lenders are more interested in the level of equity that you have in your home, and some may not look at your credit score at all.
How does my credit score affect my mortgage rate?
Having a higher credit score gives you more options when choosing a mortgage lender, and you are more likely to be offered a lower mortgage interest rate. Having a poor credit score will limit your course of action. The Canada Mortgage and Housing Corporation (CMHC) requires a minimum credit score of 680 to qualify for its mortgage default insurance. Private mortgage insurance providers, such as Canada Guaranty and Genworth Canada, have similar requirements. Since insured mortgages often come with lower interest rates than uninsured mortgages, having a credit score below 680 can be disadvantageous.
You can ask for and may get a better interest rate the higher your credit score is. A person with a score of 760 and up can usually get a better interest rate than someone with a score of 660. Real estate is leveraged and even a fraction of a percent difference in your mortgage rate can add up to a significant amount of money saved over the term of the mortgage.
For example, perhaps you’re thinking of buying a $500,000 home with a 20% down payment and plan to make monthly mortgage payments. If your mortgage rate is 3.00%, the total interest you will pay for your mortgage over 25 years is $167,895. If your mortgage rate is 2.75%, your total interest will be $152,614. That’s a difference of just over $15,000, which can be obtained just by working a little on improving your credit score before applying for a mortgage.
How can I improve my credit score?
Your first step when thinking about buying a home or refinancing your mortgage is to check your credit score. You can access your credit report for free from Equifax or TransUnion, or you can use a free credit service such as Credit Karma. If you do this ahead of time, such as a year or two before getting a mortgage, you will then have time to improve your credit score. Here are a few ways to boost your credit score:
Make all payments on time
If you can pay the amount you owe in full, do so, but at least pay the minimum amount on time on your credit card. This is especially important for people with short credit histories. Paying on time applies to all bills, such as your utility bills, any loans, and your cell phone plan.
Don’t cancel credit cards that you don’t use
Canceling these cards will reduce the average age of your credit history, which is a factor in calculating your credit score. Having a longer credit history is better than having a short credit history. What is even better than just tossing them in a drawer is to use them occasionally and pay them off immediately. Having activity on your card will show that you are actively using your credit, but paying them off immediately will allow you to avoid interest charges.
Establish a track record of successful credit use
Not having a credit history will mean that potential lenders cannot assess how you handle and manage credit. This unknown risk will make lenders more wary when deciding whether or not to extend credit to you. Having a good income does not guarantee that you will qualify for a mortgage if you have no credit history, such as if you have no credit cards or other debt. Paying by cash for everyday purchases means that you will avoid interest, but using a credit card responsibility and paying it off in full will build up your credit report and also avoid interest.
Use less than 30% of your available credit
Keep your credit utilization rate to 30% or less, and try not to exceed 35% of any single credit card’s limit. If necessary, spread your purchases over several credit cards to keep within this limit or pay off your balances before your monthly statements. Higher balances, especially those close to your card limit, may negatively affect your credit score. Going over your credit limit can also lower your credit score, and may also come with overage charges.
Limit your credit inquiries
Another piece of information on your credit report is a history of who has asked to see that report. There are two types of inquiries: soft inquiries and hard inquiries. Soft inquiries are not shown to potential lenders and are inquiries from you or your current creditors, or perhaps a company offering you a pre-approved credit card. Hard inquiries are the ones that show up when a financial institution looks at your report. These are from lenders that you have applied for a loan or a credit card from. These inquiries remain on your credit card report for three years and can impact your credit score temporarily. Having a lot of credit inquiries can lower your credit score and can be a red flag to potential lenders, as it may show that the borrower is desperate for credit.
Pay your rent on time
If you are renting a home, it is important to pay your rent in full and on time. Rent is one of the largest financial expenses you will make each month. Demonstrating that you are able to handle that cost will help your credit score if the landlord is reporting the monthly payments to a credit bureau. This is especially important if you are planning on buying a home. If you make regular rental payments before you approach a lender for a mortgage, they will have more confidence that you can make payments on a potential mortgage.
How can I get a mortgage with a poor credit score?
If you have a poor credit score you may be denied credit for a mortgage or may have to pay a higher interest rate. It could affect you even if you’re looking for a rental apartment as landlords often do a check of your credit report, or potential employers when you apply for a job.
There are alternatives available if you have a poor credit score. In the case of renting or getting a loan, you may be able to have someone cosign for you. This is not a light obligation, however, as by doing this, they assume financial responsibility if you are ever unable to fulfill the terms of the agreement.
If you want to apply for a mortgage, check with a mortgage broker with access to lenders that are willing to lend to people with low credit scores. If you work with a private lender, your mortgage rate will often be higher than a regular mortgage from a bank. Private mortgage lenders are often the last resort for those denied by traditional lenders, and so they come with shorter terms, from six to 24 months. The goal would be to have a strong enough financial situation or credit score to be able to switch or refinance with a traditional lender afterward. Your mortgage broker may put you in touch with a trust company or alternative lender if your credit score is less than ideal.
If you have a low credit score because you are new to Canada, don’t discount the opportunity to work with the top banks. They have mortgage programs especially for newcomers and will understand your credit score and short credit history, such as CIBC’s Newcomers to Canada mortgage programs. Some may also consider your credit history outside of Canada.
The Bottom Line
Your credit score is vital if you want to ever borrow money. Improving your credit score, even one that is currently good, is one way to show that you understand how to use credit and can be responsible in paying back your debt, whether it’s for car loan payments or a mortgage. Take the time to investigate your credit score and build up a responsible credit history before you start looking at homes to purchase to strengthen your application, have more options and flexibility, and potentially reduce your interest costs.