The simple answer: a lot.

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.