Mortgages and Your Credit Score

A mortgage rate is the interest rate you'll pay on the money you use to purchase your home. It is usually expressed as an APR, or annual percentage rate, which is the interest rate for the entire year, even though it may be charged monthly or daily.

Yes, your credit score affects your ability to obtain a mortgage. If you have an ‘excellent credit score’, you'll have access to traditional lenders (like banks and credit unions) and the best mortgage rates. If you have a ‘good credit score’, you'll have access to most conventional lenders and reasonable interest rates. If you have a ‘poor credit score’, you may not be able to obtain a mortgage from traditional, high-quality lenders. Find out more about the different factors that impact your credit score.

Applying for a mortgage requires a hard check on your credit score. This type of check does negatively affect your credit score, and applying for multiple mortgages through different lenders can be a red flag that you are attempting to take on more debt than you can handle. To avoid this, research your possible lenders first and determine which one you want to use and just submit one application. Alternatively, you could use a mortgage broker, who will only perform one hard credit check on your application and shop around for the best lender with the lowest rate.

You can get a mortgage in Canada through a few sources. You can go directly to a bank or credit union and apply for a mortgage. You could also opt to use a mortgage broker, who will take your relevant financial details and shop around for the best mortgage rate on your behalf. After you submit your application, you'll be pre-approved by your lender for a mortgage rate and maximum purchase price. Preapprovals usually lock in your mortgage rate for 60 to 90 days. After you place an offer on a home, you'll submit the additional documentation required to finalize your mortgage approval and transfer the funds to secure your home purchase.

There are two credit reporting bureaus in Canada, Equifax, and Transunion. Mortgage lenders will use credit scores from both bureaus to determine whether you are a good candidate for a mortgage.

Your credit score is a number between 300-900. Anything above 700 shows that you have managed your money well and are a good candidate for a mortgage. A score between 600-700 means that you are slightly risky, and the rest of your application should be strong to offset the lower score. A score below 600 means you could be considered a risky borrower and will require higher interest rates or alternative lenders.

You can easily compare mortgages by using an online comparison website. These websites pull mortgage rates directly from lenders and are always up to date. If you'd prefer a more customized approach to your mortgage comparisons, you can choose to work with a mortgage broker.

Your mortgage term is the period that your mortgage rate is locked in. For example, if you obtain a 5-year fixed-rate mortgage at 2.29%, your mortgage rate would stay at 2.29% for the full five years, no matter what happens in the marketplace. A variable rate mortgage will fluctuate with the prime rate over your term, but it's relation to the prime rate (for example, Prime – 0.45%) will stay the same for the entire term.

Mortgage terms vary in length. You can choose a term as short as six months, or as long as ten years, but five years is the most common option. When selecting a term, keep in mind that breaking the term early can result in penalties and fees, so try and choose a term that makes sense for your situation. For example, if you plan to be in the home for more than five years, choose a five-year term. If there is a good chance you or your partner have to relocate for work, a shorter term will have lower penalties if you have to break your mortgage term early.

At the end of your mortgage term, you'll renew your mortgage with a new interest rate and new term.

A mortgage amortization period is the total length of time that you'll pay down your mortgage. A typical amortization period is between 25 and 30 years, but you can choose a shorter amortization period, for example, ten years. Keep in mind that the shorter your amortization period, the higher your monthly payment, as the loan is being paid off over a shorter period.

Contrary to what you might think, a larger down payment doesn't always equate to a lower mortgage rate. When you apply for a mortgage with a down payment of less than 20%, it's called a high ratio mortgage, and must be insured with mortgage default insurance. This insurance protects the lender in case you default on your mortgage payments. This insurance makes mortgages with a down payment of less than 20% inherently less risky. As a result, your lender is able to offer very competitive interest rates, even if you have a smaller down payment.