How much does your credit score affect your mortgage rate?

This article has been updated from a previous version.

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.

The latest report from FICO, a data analytics company focused on credit scoring services, shows that the average score of Canadian borrowers stands at 762 based on data they examined from April 2023.

Read more: What type of mortgage and term should you get?

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

While there is no absolute minimum credit score, it does vary between lenders.  As of July 5, 2021, CMHC reduced the minimum credit score requirement from 680 to 600. This allows borrowers with a credit score of 600 or higher to qualify for a mortgage without mortgage insurance.

If your credit score falls below 600, you’d likely need to make at least a 20% down payment.

The reduced minimum credit score requirement is meant to provide 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.

Read more: Should you refinance your mortgage?

Costly differences

To put all this in perspective, the lowest conventional 5-year fixed-rate mortgage available for well-qualified borrowers is 4.79%. A non-prime borrower would have to pay around 5.79% to 6.79%, for the same term.

On a $500,000 mortgage with a 25-year amortization, and 20% down, a 5.79% interest rate would amount to $231 more in monthly payments than a 4.79% interest rate.

After considering the effects of compounding, paying that much more would make a noticeable dent in the average Canadian’s retirement savings.

Use our Mortgage Payment Calculator to figure out your monthly payments

Debt ratios

During the pandemic, the CMHC allowed lenders to use your credit score to help determine your maximum allowable debt ratios when underwriting your mortgage. This was to help protect buyers and lenders both from taking on too much risk. 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 that  low maximum ratios weren’t as effective as they had hoped. In July 2021, the CMHC reverted to their old practices and 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.from 35% to 39% and the Total Debt Service Ratio (TDSR) from 42% to 44% for all borrowers, regardless of your credit score.

Read more: What is a debt-to-income ratio and how does it affect you?

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 should prioritize improving their credit score, especially if they are hoping to qualify for a new rate or take out a mortgage with a private lender.

To improve the odds of getting a favourable next term, you can do the following to bump up your credit score, according to the Government of Canada website:

• Make timely payments or at least the minimum payment if you can’t pay the full amount.
• Don't go over your credit limit.
• The longer you keep a credit account open and active, the better for your score
• Limit the number of credit checks. Too many checks may signal urgency or excessive borrowing.
• Aim for a mix of different credit types, such as having a credit card and car loan, while making sure you can pay back any money you borrow.

Your credit score will change over time as your credit report is updated. According to the Financial Consumer Agency of Canada, this process typically takes 30 to 90 days.

During this period, focus on improving your credit score. By doing so, you’ll unlock better interest rates, potentially saving thousands over your mortgage term.