How to Get a Better Mortgage Rate by Having a Good Credit Score

The key to a great mortgage rate? Your credit score.

The better your credit score, the more room you have to negotiate for the best mortgage rate. 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. 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. Mortgage brokers also have access to B-lenders, who are more willing to lend to those with low credit scores. 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 a number that tries to show how credit-worthy you are. Your credit score 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 [1]. Your credit score is an indication of how reliable in the past you were at obtaining 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 [2].

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 result. In general, a score of 600 to 649  is considered to be fair; 650 to 719 is good, and 720 to 799 is very good; and 800 and more is excellent [2]. There’s no one definite number that will ensure that you get the best mortgage interest rate. Higher scores mean that you have shown responsible credit behaviour in the past.

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; 749-799 is very good; 670 to 739 is good; 580 to 669 is fair; and lower than 579 is poor [3].

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. Lenders like Pololoans have access to multiple lenders that could still be willing to lend you. 

How does my credit score affect my mortgage rate?

In Canada, if your credit score is over 660 (good and above), you should be able to obtain a good interest rate for your mortgage. Some banks will accept a score in the range of 600 to 700 [4]. But why stop there? Unless you’re really at the top of the range (760+), you can always improve your score and subsequently get a lower interest rate. And that can save you a lot of money on your mortgage in the long run.

You can ask for and 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 considered a leveraged investment and even a 0.25% difference in your mortgage rate can add up to a significant amount of money saved over the term of the mortgage [5].

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, just for 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 use a free credit service such as Equifax or Credit Karma. If you do this ahead of time, say a year or two, you’ll have time to improve your credit score [5].

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 [5]. And paying on time applies to all bills, including your household expenses, any loans and your cell phone plan.

Don’t cancel credit cards that you don’t use

Cancelling these cards will reduce the average age of your credit history, which is a factor in calculating your credit score. What’s even better than just tossing them in a drawer is to use them occasionally and pay them off immediately. This will introduce a new debt and successful repayment to your credit report [6].

Establish a track record of successful credit use

If you always pay cash, then you won’t build up a credit history and potential lenders can’t assess how you handle credit. Even if you have a good income and a 20% down payment on a home, if you don’t have a credit card or other form of credit such as line of credit, you may have problems getting a mortgage [7].

Use less than 30% of your available credit

Keep your credit utilization rate to 30% or less, and try not to exceed using over 35% of any single credit card’s limit[8]. 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.

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 to whom you’ve applied for a loan or a credit card. These inquiries remain on your credit card report for three years and can impact your credit score temporarily [1].

Pay your rent on time

If you’re renting a home, it’s 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’re 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’re planning on buying a home. If you make regular rental payments before you approach a lender for a mortgage, they’ll 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 [9] 

But that’s not necessarily the end of the road. 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, you’ll need a 20% down payment and your mortgage rate will be higher than a regular mortgage, but it’ll let you get a home in your hands faster and you’ll always be able to refinance later. If your credit score is bordering on OK, your mortgage broker may put you in touch with a trust company or alternative lender [10].

If you have a low credit score because you’re 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. You should still go through your mortgage broker because they will often have access to better rates and terms even from the top banks.

The Bottom Line

Your credit score is a vital part of your identity if you want ever to borrow money. Improving your credit score, even one that’s 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 a car loan or a mortgage.

Take the time to investigate your credit score and build up a responsible credit history before you even start looking at homes to purchase.

  1. What Information is in a Credit Report? Equifax.
  2. What is a Good Credit Score? Equifax.
  3. How your Credit Score affects your Mortgage rate. Bankrate.
  4. What should your credit score be to buy a house? Manulife Bank.
  5. How to Build a Credit Score that gets you a Great Mortgage rate. Globe and Mail.
  6. Five Tips to Increase Your Credit Score Quickly. Canadian Mortgage Trends.
  7. A 23-year-old with an $80K job and no debt couldn’t get a mortgage – this is why. Global News.
  8. Improve your Credit Score. Government of Canada.
  9. Why your Credit Score is Important. Government of Canada.
  10. Buying a House in Canada with Bad Credit. Loans Canada.
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