Why your credit score is important with getting a mortgage?

Your Canadian credit score helps lenders evaluate your financial health, indicates the level of risk involved in lending you money, and determines whether or not you’re an eligible candidate for a mortgage or loan.

It’s a figure within the range of 300 and 900. If it’s above 700, this means you manage your credit well and lenders don’t need to be overly concerned about allowing you to borrow money. On the flipside, if your credit score sits somewhere in the 400s, it’s clear you’ve mismanaged your money, which puts you in a high-risk bracket where you might need to pay a higher interest rate on your mortgage.

How it Works

Data is sent to credit reporting agencies by organizations that lend you money or give you credit cards like retailers, banks, credit unions and other financial institutions. This data is then compiled and tracked to give you a credit score.

In Canada, there are two credit reporting agencies:

  1. Equifax Canada
  2. TransUnion

Both agencies can send you a free copy of your credit report every year. And for a small fee, you can access your credit score at any time online. It’s a good idea to check your credit report annually to make sure there are no errors. 

What Determines Your Credit Score The two credit reporting agencies in Canada, Equifax and Transunion, have their own distinct formulas to calculate credit scores. Here’s what they’re based on:

  • Credit Utilization – Calculate the amount of debt you have as a percentage of your available credit (aim for less than 35%).
  • Credit History The longer your accounts have been open, the better.
  • Past Payment History – Check for overdue accounts, late or missed payments, bankruptcies or written-off debts. These all lower your credit score.
  • Types of Credit – A good credit mix is always best. Consider a credit card, an auto loan and a line of credit.
  • New Credit Requests – The more you apply for new credit, the more credit checks there are against your file, which can lower your score if the number of checks is too high and too frequent.

How Your Canadian Credit Score Affects Your Mortgage 

When you’re looking for a mortgage, your credit score plays a huge role. Your number is critical because it determines which lenders will loan you money and which lenders won’t, and what your mortgage interest rate will be. If your credit score is above 700, it’s likely that prime lenders such as the major banks will give you a mortgage. 

And even though prime lenders will still consider you if your score is between 600 and 700, the other areas of your application must be strong enough prior to approval. The lower your score, the higher the risk. To control these higher risk scenarios, some lenders such as trust companies and private lenders request higher interest rates, whereas others simply decline your application.

But don’t worry, your credit score isn’t the be-all, end-all. No matter what your score, lenders also consider your income, debt obligations, property equity and property type.

Lender Type

Description

Credit Score

Mortgage Rate

Example Lender

Major Banks

Financial institutions including the big banks. Usually with strict lending requirements.

600-900

Prime

BMO TD Canada Trust

Trust Companies/Bad Credit Institutional Lenders

Financial institutions accommodating to those with bad credit. Lending requirements are not as strict as the big banks.

550-650

Subprime

Equitable Bank

Private Lenders

Private companies or individuals who loan private funds.

 

Below 600

High

Wealthbridge

What You Can Do to Improve Your Canadian Credit Score

If you have a weak credit score or you’re new to Canada and need to establish your credit, here’s what you can do to boost your score:

  1. Make your payments on time – and at least the minimum.
  2. Have at least two credit products in use – and try to use some of both every month.
  3. Don’t use more than 35% of your available credit. For example, if you have $10,000 worth of total available credit, try not to utilize more than 35%, or $3,500, at once.
  4. Lower your frequency of credit applications. The more times you apply for credit, the worse it looks to lenders. But remember, checking your own credit doesn’t affect your score.
  5. Establish credit history for as long as possible. Even if you never use it, don’t cancel your oldest credit card or account. The longer your credit history, the better your credit rating.

Work on your credit. It’s worth it in the end! When it comes time to borrow money, you won’t have unnecessary hoops to jump through or stresses to deal with. In fact, you’ll be a desirable candidate to lenders.