It takes credit to build credit – most of us have heard this at some point in our early adult years. Some of us heard it when we got our first credit card; others when they went to apply for some kind of loan and realized they had no credit score. The crucial point is that if it takes credit to build credit, it also takes credit to destroy credit. So what exactly is “credit” when it comes to finances, and how does your credit score affect your mortgage interest rate?
Credit is basically a number system that rates the likelihood that you will repay borrowed money. The higher your score, the “safer” you appear to lenders, and the lower your score, the “riskier” you are.
The first step to building your credit is to get a credit card. Credit cards usually carry a high interest rate and can pose a certain risk if you use them too freely without considering that you will have to pay them back afterwards. However, by having and using a credit card and then paying off part or all of your balance each month, you show the lender that you are likely to repay your debts. This helps to increase your credit score. In addition to making payments on time, keeping balances low is essential, as this shows the lender that you are not spending more than you are able to repay.
Next, it’s important to understand your credit score. In Canada, a credit score ranges from 300 to 900. A higher score is always desirable, but any score between 743 and 789 is generally considered good, and anything above 790 is very good. A score between 693 and 742 is considered “fair”. Anything below 692 is considered “poor,” which means you may have a harder time convincing lenders to lend you money. These ranges are different when applying for a mortgage and getting a reasonable interest rate, as you will read more about below.
In Canada, a credit score is determined by several factors: payment history, credit used versus available credit, credit history, public record and inquiries. These factors are weighted at different amounts, with payment history generally having the most weight and the number of firm credit applications having the least weight.
Does Your Credit Score Affect Your Mortgage Interest Rate?
Many wonder if and how their credit score affects their ability to buy a home. The simple answer is yes; it absolutely affects your mortgage interest rate. The higher your score, the lower the interest rate you’ll usually get – and when you’re talking about a loan that amounts to hundreds of thousands or even millions of dollars, a percentage or two is a big deal. difference.
Generally, a credit score of 760 or higher will give the borrower access to the best mortgage rates, provided they have consistent income and meet lending criteria such as the mortgage stress test. A credit score between 650 and 759 will have a moderate impact on the mortgage rates available to you, but you will still be able to access all mortgage rates available on the market. This is especially true if you have other factors on your side, such as a large down payment.
As your credit score declines, your access to better interest rates also declines. While in the past a credit score above 680 was the minimum credit score requirement, Canada Mortgage and Housing Corporation (CMHC) has increased the minimum credit score requirement from 680 to 600 as of July 5, 2021. While this is good news for those who can rehabilitate their credit score or those who are just starting to build credit, it does not guarantee that they will have access to the best mortgage rates. . Indeed, with a score below 680, the borrower will see the rates gradually increase. Typically, borrowers with a credit score of 600 would be considered “unpreferred,” meaning their mortgage rate would normally be about two percentage points higher than a “primary” borrower.
With a credit score below 600, it is almost impossible to get a mortgage from a bank in Canada. This is where B lenders and private mortgage lenders come in. There are many private mortgage lenders across the country with no minimum credit score requirement – not necessarily the best thing if you’re looking for a rate reasonable mortgage. Many private mortgage lenders will charge an interest rate that is considerably higher than the prime rate or even the non-prime rate that a bank will offer. These lenders may also add additional fees due to the borrower’s bad credit, as this gives them a type of insurance in the event of a loan default.
If you’re planning on buying a home soon, it might be a good idea to track your credit score and start improving it if necessary.
Still have questions ?
At the start of your home buying journey, you probably have a lot of questions. You’re not alone. RE/MAX Canada has taken to the streets to find out how much (or how much) Canadians know about real estate and offer answers in the process.
When you’re ready to buy, be sure to work with an experienced, professional real estate agent who can help you navigate the market. Click HERE to find a RE/MAX agent near you.