How Credit Scores Affect Mortgage Rates
Your credit score can make a big difference when you're getting ready to buy a home. A better credit score can mean lower interest rates on your mortgage, larger loan amounts, and an easier time getting approved.
How Lenders View Credit Scores
In Canada, credit scores range from 300 to 900, with higher scores being better. Here’s a quick summary of how mortgage lenders view different credit score ranges.
Credit Scores of 720+
Lenders consider credit scores above 720 to be "excellent." 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 standard lending criteria. According to data from the Canada Mortgage and Housing Corporation, a majority of Canadians with mortgages fall into this category.
Credit Scores of 650-720
These credit scores are "good," but borrowers in this range are unlikely to have access to the lowest interest rates on the market. However, you will still usually be able to get a loan at slightly higher rates, so you'll have the opportunity to improve your credit score.
Credit Scores of 600-649
Individuals in this range have "fair" credit scores. Lenders may require additional proof of debt repayment before offering a mortgage. Individuals who successfully get a mortgage will need to pay higher rates than those with better credit scores.
Credit Scores Under 600
Those with a credit score under 600 are considered “non-prime” or "sub-prime" borrowers. Folks in this category are unable to access the attractive mortgage rates you generally see advertised. Most non-prime rates run about one to two percentage points (100-200 basis points) higher than prime rates. People with serious credit issues or an inability to prove enough income could pay much more.
A Better Credit Score Makes a Big Difference
To put all this in perspective, if you were a well-qualified borrower with a 5-year fixed-rate mortgage at 2.48% a non-prime borrower might expect to pay roughly 3.99% for the same term. On a $300,000 mortgage with a 25-year amortization, the difference would amount to $196 more in monthly payments—a total of $14,340 more in interest payments over a five-year term.
Borrowers with low credit scores may also have to pay additional fees, provide extra proof of ability to pay, and come up with higher down payments. Lenders want to take extra precautions when extending mortgages to individuals with less-than-stellar credit histories.
How to Improve Your Credit Score for a Better Mortgage
If your score is below average, never fear. You still have time to improve your credit score, but knowledge is the first step. According to a Rates.ca survey, only 67% of Canadians aged 18 to 24 know their credit score. Make sure to stay up to date.
Once you determine your credit score, take the following actions to improve your chances of getting a low-interest mortgage:
- Pay all accounts on time.
- Pay down high balances on loans and credit cards.
- Don't close any old credit card accounts.
- Avoid opening too many new credit card accounts or other lending products.
By paying your bills on time, you show lenders you're a trustworthy borrower, worthy of a low-interest loan. Consider working to boost your credit score before beginning the homebuying process. If you already have a mortgage, improving your credit score can improve your chances of getting a better mortgage rate at renewal.