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How Much Does Your Credit Score Affect Your Mortgage Rate?

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The simple answer is, 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 Rates.ca 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.

Here’s a quick summary of how different credit score ranges are viewed by most mortgage lenders:

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. Data from CMHC shows that a large majority of Canadians with mortgages (about 4 out of 5 such borrowers) fall into this category.

Credit Scores of 650-720

This is where rates start to vary for borrowers. If your credit score falls in this range, you can often expect to have access to only the second- or third-best mortgage rates available on the market. That's especially true if your score is below 680.

Credit Scores of 600-649

Rates increase incrementally more for borrowers with a credit score in this range. That's because many lenders start to view them as “fringe borrowers.”

Credit Scores Under 600

Those with a credit score under 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 currently available for well-qualified borrowers is 2.74%. 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 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

Lenders also use your credit score to help determine your maximum allowable debt ratios when underwriting your mortgage.

For example, if your score is:

  • Under 680, your maximum Gross Debt Service Ratio (GDSR) would be 35% and your maximum Total Debt Servicing Ratio would be 42%
  • Over 680, your maximum GDSR would be 39% and your maximum TDSR would be 44%

“People with higher credit scores get rewarded with more borrowing flexibility,” credit score expert Chantal Chapman told our sister site, RateSpy.com. A better rating “means you can get a bigger mortgage with the same amount of income.”

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 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 as 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.