It takes credit to build credit; most of us have heard this at some point in our early years of adulthood. Some of us heard it when we got our first credit card; others when they went to apply for a loan of some type and realized they didn’t have a credit score. The crux is that while it takes credit to build credit, it also takes credit to destroy credit.
So, what exactly is “credit” when it comes to finances, and does your credit score impact your mortgage rate?
Credit is essentially a numbering system that gauges how likely you are to repay borrowed money. The higher your score, the ‘safer’ you seem to lenders, and the lower your score, the ‘riskier’ you are.
The first step to building your credit is to get a credit card. Credit cards typically carry high interest rates and can be a risk if you use them too freely without considering that you have to pay them off afterwards. However, by having and using a credit card and then paying off your balance in part or in full each month, you show the lender that you are likely to repay your debts. This helps to increase your credit score.
In addition to making payments on time, it is essential to keep balances low, as this shows the lender that you aren’t spending more than you’re able to pay back.
What If You Pay Rent?
For Canadians concerned about the relationship between credit score and mortgage interest rate, consistent rent reporting can demonstrate financial responsibility similar to mortgage payment history. There are several programs that use your monthly rent payment to boost your credit rating, as long as you pay your rent on time. These programs typically require landlord verification or that you make rent payments through their platform. Some may even verify rent payments using electronic bank records.
These programs can help demonstrate a positive credit history, with costs as low as $5 per month. This verification process helps lenders see that you can handle regular rent payments similar to a mortgage, potentially helping you qualify for better interest rates.
What If You Have Student Loan Debt?
Debt is debt, and as long as you’re making payments on time, your credit rating shouldn’t suffer. With that said, carrying too much debt will impact the amount of mortgage you qualify for. Here are a few things you can do when applying for a mortgage with student debt:
Pay off other debt. Even seemingly minor credit card debt will impact your debt-to-income ratio. Paying these off ASAP will improve your mortgage affordability.
Restructure your student loan. Debt ratios are based on monthly payments. By restructuring your student loan to extend payments over a longer period of time, you’ll reduce your monthly obligations and positively impact your debt ratios. However, it’s worth noting that you’ll pay more in interest over time.
Make regular student loan payments. Showing you’re responsible and can handle your debt responsibilities will improve your credit score.
Get pre-approved. If you aren’t sure about whether you will be able to get a mortgage with student loan debt, apply for pre-approval. This will give you a set mortgage amount and interest rate so that you know what you can afford.
Understanding Your Credit Score
In Canada, credit scores range from 300 to 900. A higher score is always desirable, but any score between 743 and 789 is usually considered good, and anything over 790 is very good. A score between 693 and 742 is considered ‘fair.’ Anything below 692 is considered ‘poor,’ which means you may have a more challenging time getting lenders to loan you money.
These ranges are different when applying for mortgages and securing a reasonable interest rate. In Canada, a credit score is determined by several factors, including payment history, the ratio of used to available credit, credit history, public record, and the number of inquiries. These factors are weighted differently, with payment history usually carrying the most weight and the number of hard credit inquiries carrying the least.
Does Your Credit Score Affect Your Mortgage Rate?
Does your interest rate depend on your credit score? The simple answer is yes — there is a direct relationship between credit score and mortgage interest rate. The higher your score, the lower the interest rate you will usually get – and when you’re talking about a loan that is hundreds of thousands, if not millions, of dollars, a percentage or two makes a big difference.
Generally, a credit score of 760 or higher will give the borrower access to the best mortgage rates, as long as they have consistent income and meet the lending criteria, such as the mortgage stress test. A credit score between 650 and 759 will moderately impact the mortgage rates available to you, but you may still have access to all mortgage rates on the market, especially if you have other factors on your side, like a hefty down payment.
As your credit score drops, so does your access to better interest rates. While in the past, a score above 680 was the minimum credit score requirement, Canada Mortgage and Housing Corp. (CMHC) dropped the minimum requirement from 680 to 600 as of July 5, 2021.
While this is good news for those rebuilding their credit or just starting out, it doesn’t guarantee access to the best mortgage rates. In fact, with a score below 680, the borrower will see rates incrementally increase. Typically, borrowers with a credit score of 600 are considered “non-prime,” meaning their mortgage rate could be about two percentage points higher than that of a “prime” borrower.
With a credit score of less than 600, it’s almost impossible to get a mortgage from a traditional bank in Canada. This is where B lenders and private mortgage lenders come into play. While these lenders may have no minimum credit score requirement, their rates are substantially higher than prime or non-prime bank rates. They may also charge extra fees to offset the risk of default.
If you’re thinking of buying a home soon, it’s a good idea to track your credit score and work on improving it before applying for a mortgage.
Does a Higher Credit Score Mean a Lower Interest Rate?
Absolutely. A higher credit score demonstrates responsible financial management, making you less risky in the eyes of lenders.
Here’s how different credit score ranges typically affect mortgage interest rates in Canada:
Credit Score Range Interest Rate Impact What This Means for Your Mortgage
800 and above Lowest available rates With an 800 credit score, you’ll receive the most competitive rates, saving thousands over your mortgage term.
740–799 Very favourable rates A 748 credit score will still qualify you for excellent interest rates, just slightly higher than the absolute best.
700–739 Good rates Competitive mortgage options, though not the lowest.
650–699 Moderately higher rates Interest rates may be 0.5–1% higher than the best rates.
600–649 Significantly higher rates You’ll see noticeably higher monthly payments.
Below 600 Highest rates or loan denial May pay 2–4% more in interest, if approved at all.
The difference between the rate offered to someone with excellent credit versus someone with poor credit can add up to tens of thousands of dollars over the lifetime of a mortgage. For example, on a $500,000 mortgage with a 25-year amortization, just a 1% difference in your rate could mean paying over $100,000 more in interest.
That means improving your score from 600 to 700 could save you a significant amount over time.
When you’re ready to buy, make sure you work with an experienced and professional real estate agent who can help you navigate the market.
So, what exactly is “credit” when it comes to finances, and does your credit score impact your mortgage rate?
Credit is essentially a numbering system that gauges how likely you are to repay borrowed money. The higher your score, the ‘safer’ you seem to lenders, and the lower your score, the ‘riskier’ you are.
The first step to building your credit is to get a credit card. Credit cards typically carry high interest rates and can be a risk if you use them too freely without considering that you have to pay them off afterwards. However, by having and using a credit card and then paying off your balance in part or in full each month, you show the lender that you are likely to repay your debts. This helps to increase your credit score.
In addition to making payments on time, it is essential to keep balances low, as this shows the lender that you aren’t spending more than you’re able to pay back.
What If You Pay Rent?
For Canadians concerned about the relationship between credit score and mortgage interest rate, consistent rent reporting can demonstrate financial responsibility similar to mortgage payment history. There are several programs that use your monthly rent payment to boost your credit rating, as long as you pay your rent on time. These programs typically require landlord verification or that you make rent payments through their platform. Some may even verify rent payments using electronic bank records.
These programs can help demonstrate a positive credit history, with costs as low as $5 per month. This verification process helps lenders see that you can handle regular rent payments similar to a mortgage, potentially helping you qualify for better interest rates.
What If You Have Student Loan Debt?
Debt is debt, and as long as you’re making payments on time, your credit rating shouldn’t suffer. With that said, carrying too much debt will impact the amount of mortgage you qualify for. Here are a few things you can do when applying for a mortgage with student debt:
Pay off other debt. Even seemingly minor credit card debt will impact your debt-to-income ratio. Paying these off ASAP will improve your mortgage affordability.
Restructure your student loan. Debt ratios are based on monthly payments. By restructuring your student loan to extend payments over a longer period of time, you’ll reduce your monthly obligations and positively impact your debt ratios. However, it’s worth noting that you’ll pay more in interest over time.
Make regular student loan payments. Showing you’re responsible and can handle your debt responsibilities will improve your credit score.
Get pre-approved. If you aren’t sure about whether you will be able to get a mortgage with student loan debt, apply for pre-approval. This will give you a set mortgage amount and interest rate so that you know what you can afford.
Understanding Your Credit Score
In Canada, credit scores range from 300 to 900. A higher score is always desirable, but any score between 743 and 789 is usually considered good, and anything over 790 is very good. A score between 693 and 742 is considered ‘fair.’ Anything below 692 is considered ‘poor,’ which means you may have a more challenging time getting lenders to loan you money.
These ranges are different when applying for mortgages and securing a reasonable interest rate. In Canada, a credit score is determined by several factors, including payment history, the ratio of used to available credit, credit history, public record, and the number of inquiries. These factors are weighted differently, with payment history usually carrying the most weight and the number of hard credit inquiries carrying the least.
Does Your Credit Score Affect Your Mortgage Rate?
Does your interest rate depend on your credit score? The simple answer is yes — there is a direct relationship between credit score and mortgage interest rate. The higher your score, the lower the interest rate you will usually get – and when you’re talking about a loan that is hundreds of thousands, if not millions, of dollars, a percentage or two makes a big difference.
Generally, a credit score of 760 or higher will give the borrower access to the best mortgage rates, as long as they have consistent income and meet the lending criteria, such as the mortgage stress test. A credit score between 650 and 759 will moderately impact the mortgage rates available to you, but you may still have access to all mortgage rates on the market, especially if you have other factors on your side, like a hefty down payment.
As your credit score drops, so does your access to better interest rates. While in the past, a score above 680 was the minimum credit score requirement, Canada Mortgage and Housing Corp. (CMHC) dropped the minimum requirement from 680 to 600 as of July 5, 2021.
While this is good news for those rebuilding their credit or just starting out, it doesn’t guarantee access to the best mortgage rates. In fact, with a score below 680, the borrower will see rates incrementally increase. Typically, borrowers with a credit score of 600 are considered “non-prime,” meaning their mortgage rate could be about two percentage points higher than that of a “prime” borrower.
With a credit score of less than 600, it’s almost impossible to get a mortgage from a traditional bank in Canada. This is where B lenders and private mortgage lenders come into play. While these lenders may have no minimum credit score requirement, their rates are substantially higher than prime or non-prime bank rates. They may also charge extra fees to offset the risk of default.
If you’re thinking of buying a home soon, it’s a good idea to track your credit score and work on improving it before applying for a mortgage.
Does a Higher Credit Score Mean a Lower Interest Rate?
Absolutely. A higher credit score demonstrates responsible financial management, making you less risky in the eyes of lenders.
Here’s how different credit score ranges typically affect mortgage interest rates in Canada:
Credit Score Range Interest Rate Impact What This Means for Your Mortgage
800 and above Lowest available rates With an 800 credit score, you’ll receive the most competitive rates, saving thousands over your mortgage term.
740–799 Very favourable rates A 748 credit score will still qualify you for excellent interest rates, just slightly higher than the absolute best.
700–739 Good rates Competitive mortgage options, though not the lowest.
650–699 Moderately higher rates Interest rates may be 0.5–1% higher than the best rates.
600–649 Significantly higher rates You’ll see noticeably higher monthly payments.
Below 600 Highest rates or loan denial May pay 2–4% more in interest, if approved at all.
The difference between the rate offered to someone with excellent credit versus someone with poor credit can add up to tens of thousands of dollars over the lifetime of a mortgage. For example, on a $500,000 mortgage with a 25-year amortization, just a 1% difference in your rate could mean paying over $100,000 more in interest.
That means improving your score from 600 to 700 could save you a significant amount over time.
When you’re ready to buy, make sure you work with an experienced and professional real estate agent who can help you navigate the market.
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