How Credit Scores Affect Mortgage Rates

July 19, 2012

In today’s mortgage market it’s easy for virtually anyone to obtain a mortgage, but how favourable of a mortgage rate you are offered will be mostly based on your individual credit score. A high credit score will result in lower rates, while a low credit score will result in higher rates. Understanding how credit scores and mortgage interest rates are related can help you to manage your credit reputation in order to obtain the best mortgage rate possible.

Calculation

Your personal credit score is calculated based on five factors: payment history, amounts owing, length of credit history, applications for new credit, and types of credit used. Approximately 35% of your credit score is based on payment history alone – so it is vital that your bills are paid on time, all the time.

About 30% of your credit score is based on what you owe – the total amount of your debt load. Keeping a credit card below 12% of your available balance can help increase your credit score, so can putting purchases on your card and paying them off immediately.

Old credit increases your credit score by giving you a longer credit history (15% of the calculation), while new credit (10% of the calculation) can damage your credit score. Only apply for new credit if absolutely necessary, and avoid closing old credit accounts unless you are certain they won’t be used.

Effect on Mortgage Rates

For many lenders the minimum credit score required to qualify for a mortgage is 500, if your score is lower special financing may be required (at much higher interest rates) or you may need to put off your home purchase while you work on improving your credit score. However, with a credit score of 500 you will be looking at significantly higher interest rates than normal, which could result in a very high mortgage payment. Credit scores above 700 will receive the most competitive rates. If your credit score is less than 700 you may want to consider taking a few months to work on improving it prior to applying for a mortgage.

Determining your Credit Score

There are two companies in Canada that track and record the credit scores for residents; Equifax and TransUnion. You can contact either of these companies by phone, internet, mail, or fax, to obtain a copy of your credit report. Note that there is typically a fee charged to provide you with your credit report.

Equifax Canada
Tel: 1-800-465-7166
Fax: 514-355-8502

TransUnion Canada
Tel: 1-866-525-0262 (except in Quebec)
Tel: 1-877-713-3393 (Quebec residents)

Improving Credit Scores

If you are considering a home purchase in the future, now is a good time to check your credit score and see if there are any anomalies or if you need to take measures to increase your score. Remember that the higher your credit score, the lower your mortgage rate will be, which can result in thousands dollars (or tens of thousands) of dollars in interest savings, as well as a lower monthly mortgage payment.

Easy ways to improve credit include ensuring you never exceed your maximum credit amount, paying off transactions at the end of every billing period, and settling debts that have been sent to collection as soon as you can. If you do not have much of a credit history consider applying for a credit card and charge a small amount to it each month, then pay it off immediately. With all these tips in mind you can improve your credit score and secure a lower mortgage rate.

Remember that your credit score changes all the time, so it is important to check it regularly and keep making those payments. If your credit score is less than 700 and you do obtain a mortgage, work to improve your score so you can obtain a lower mortgage rate when your mortgage term expires.



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