Understanding How Credit Scores Can Impact Lending & Mortgages in Canada

One of the biggest influences in the journey to homeownership is the credit score. In Canada, credit scores impact a variety of factors including rates, terms and conditions on everything from car loans to mortgages. This three-digit score is more than just a statistic, it represents the financial reliability of each person; their proven history of repayments, previous loans, and the amount of credit they’ve received. All these pieces of information are crucial to new lenders who are looking at lending hundreds of thousands, or even millions of dollars to potential homebuyers. 

What is a Credit Score?

In Canada, credit scores range from 300 to 900 points. They are calculated using a number of factors including payment timeliness, credit utilization, and length of credit history. Scores above 700 are seen as good credit and are often rewarded with more favourable rates and terms. 

Credit Scores & Mortgage Rates

A credit score directly impacts the rates provided in any mortgage approval from a lender. The higher the score, the less risky the lender views the transaction, meaning they feel more comfortable that they will see the return on their money, and therefore offer better rates and terms to those individuals. These lower rates can lead to more financial savings over time, making it a worthwhile investment of time and effort to maintain a higher credit score.

Ways to Improve a Credit Score

With individuals who have lower scores, there are some strategies to help improve before applying for a mortgage. These strategies include: 

• paying down high credit cards or debts to lower the debt utilization
• making monthly payments on time each month 
• minimizing credit inquiries from lenders as this can lower the score with each inquiry
• ensuring the information shown on the credit transcript is correct and up to date, or contacting the credit agency to rectify any errors

Other Factors Lenders Consider

Although credit scores play a vital role in mortgage financing, they are not the only factors lenders consider. Financial stability, employment history, available funds for a down payment and closing costs as well as overall current debt load also contribute to the assessment by any lender. Ensuring that the supporting documentation is provided at the beginning of the application process, can help prompt a faster and easier approval when applying for a mortgage. 

While credit scores are pivotal in the financial world, they are just one portion of a broader financial assessment when it comes to obtaining funds from banks and lenders. Understanding how credit scores work, how to improve them and how to provide additional strength to an application can make a big difference in securing favourable funding rates and terms. Working with professionals like mortgage brokers can also help in sourcing the right lenders to suit each homebuyer’s financial situation. Make sure to reach out to a trusted mortgage professional when considering applying for any mortgage product to ensure the mortgage product aligns with future financial goals and aspirations.