How does my credit score affect my mortgage rate

That’s why you’ll want to know your credit rating well before applying for a mortgage — something only 67% of Canadians aged 18 to 24 do, according to a RATESDOTCA survey.

If your score is below average, planning ahead can at least give you a chance to try and fix it. That could potentially give you access to better interest rates.

What credit score do I need to get a mortgage?

Here’s a quick summary of how different credit score ranges are viewed by most credit unions:

Credit scores of 720+

Whether a borrower has a score of 720 or 820, they generally have the same access to the best mortgage rates, so long as they have sufficient provable income and meet common lending criteria. CMHC data show that a large majority of Canadians with mortgages fall into this category — and the average score of new holders is rising (it sits at about 773).

Credit scores of 650-720

This is where rates start to blend for borrowers. Generally, the minimum desired credit score is 650. If your credit score falls in this range, you have access to all mortgage rates available on the market. That’s especially true if your score is above 680.

Credit scores of 600-649

As of July 5, 2021, the Canada Mortgage and Housing Corporation (CMHC) reduced the minimum credit score requirement from 680 to 600. This decrease provides leeway for clients who are new to Canada or just starting to build credit. However, approvals are case by case, and rates can increase incrementally for borrowers with a credit score in this range. That’s because many credit unions start to view them as “fringe borrowers.”

Those with a credit score of 600 would generally be considered “non-prime.” Folks in this category are not able to access the attractive mortgage rates you generally see advertised. Most non-prime rates run about one to two percentage points (100-200 bps) higher than prime rates. Although, people with serious credit issues, an inability to prove enough income, or the need for a second mortgage could pay much more.

Costly differences

To put all this in perspective, the lowest conventional 5-year fixed-rate mortgage available for well-qualified borrowers is 2.25% as of the time of writing on December 22, 2021. A non-prime borrower would have to pay 3.99%, give or take, for the same term.

On a $300,000 mortgage with a 25-year amortization, that would amount to $196 more in monthly payments, or a total of $17,770 in additional interest over a five-year term. After considering the effects of compounding, paying that much more would make a noticeable dent in the average Canadian’s retirement savings.

Debt ratios

In the past, lenders would use your credit score to help determine your maximum allowable debt ratios when underwriting your mortgage. For example, if your score was:

• Under 680, your maximum Gross Debt Service Ratio (GDSR) would be 35%, and your maximum Total Debt Service Ratio (TDSR) would be 42%
• Over 680, your maximum GDSR would be 39%, and your maximum TDSR would be 44%

However, the CMHC found low maximum ratios weren’t great for business. This past summer, they increased the maximum Gross Debt Service Ratio (GDSR) from 35% to 39% and the Total Debt Service Ratio (TDSR) from 42% to 44% for all borrowers — regardless of your credit score.

Improving your credit score at renewal

While having a strong credit score is helpful when applying for a new mortgage, homeowners with weak credit and an existing mortgage should also take heed. Those facing renewal in the next 12-18 months (about one and a half years) must prioritize improving their credit score.

“If you are with a private or alternative lender and coming up to your renewal date, the higher your credit score, the better,” notes credit expert Ross Taylor. Particularly with weak-credit borrowers, mainstream lenders want to see that they’ve learned their lesson and rehabilitated their credit.

He points out that even simple reporting mistakes can work against you. A payment improperly recorded late by a creditor can keep your score artificially low — costing you thousands more in interest.

“Ridding your credit report of…errors is critical to restoring your credit health and securing the best possible terms for your mortgage renewal.” And you can only do that if you check your credit regularly.

Applying for a mortgage can be a lot of work. There are documents to collect, mortgage brokers to talk to and application forms to fill out. One aspect of the process to think about is how your credit history might affect your chances of successfully applying for a mortgage.

For many people, a mortgage is the biggest form of loan they’ll ever get, and mortgage lenders want to know that the debt will be paid back. Below, we answer some key questions about why your credit history might matter when getting a mortgage.

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How does your credit history affect getting a mortgage?

Lenders use your credit report to get information on how reliable you have been at paying back debts in the past. When you apply for a mortgage you will have to supply payslips, P60s and bank statements to show how much you earn and what your monthly budget might look like. This shows lenders your current financial situation, but to predict how you might behave in the future they will also look at your credit report.

Your credit history might also affect your mortgage interest rate, in the sense that the types of mortgage you are offered will be affected by how responsibly you’ve borrowed in the past. Special introductory rates or other attractive mortgage offers might only be available to people whose credit history meets certain criteria.

Can you get a mortgage with no credit history?

It may be possible to get a mortgage if you have no credit history, but there’s a fair chance it will make things harder. If lenders have nothing to go on, they can’t be sure whether you are a responsible borrower who will pay back the money you’ve been given. If you do find a lender willing to offer you a mortgage, it might not be the type you’d prefer and the interest rate might be less competitive.

If you are worried that your lack of credit history might affect the success of your application, you might want to take some time to build a history before applying. There are specialist credit cards for people who have not used credit before, as well as other ways of building a credit history.

Can you get a mortgage with credit card debt?

Credit card debt won’t affect your ability to get a mortgage by itself. It depends on how big the debt is, how capable you are of paying it back and how well you have kept up repayments. A small amount of debt that you make regular payments on could be fine if you earn enough to cover both credit card and mortgage payments. On the other hand, if you have defaulted on credit card payments or have run up debt on several cards, lenders might decide you are too much of a risk.

Helping to improve your credit score

If you’re thinking of a buying a home and want to improve your chances of being approved by a lender, you’ll want to make sure your borrowing history is in good shape. There are different factors that affect your creditworthiness and you can read in more detail how to get credit-ready for a mortgage application in this article.

Things that can help improve your creditworthiness include making payments on loans, credit cards and bills on time each month. You should also make sure you are on the electoral register so that lenders can verify your address.

When you make an application for credit, it is reflected in your credit report as a ‘credit search’. If you make a lot of applications, it might suggest to lenders that you are reliant on credit. So, if you plan on applying for a mortgage, it might be helpful to be selective above what other loan applications you make.

To find out more, you can check your FREE Equifax Credit Report & Score which gives you a view of your borrowing history as well as an indication of how creditworthy a lender may find you. It’s free for the first 30 days and £7.95 monthly thereafter.

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