The standard is getting higher

According to the CMHC, the share of outstanding and new mortgages held by Canadians with strong credit scores (700+) has grown since 2016. As of April 2021, 87.71% of Canadian mortgagers have strong credit scores, which is the highest share in the last five years. Newly originated mortgages carrying strong borrower credit scores totaled an 86.06% share, another high figure.

Given the continuing rise in Canadian housing prices, these stats shouldn’t be surprising. As prices climb, so too does the amount prospective homebuyers often must borrow, and the stronger their overall financial position must be. With the big banks dominating mortgage lending in Canada, and their new origination outpacing non-bank lenders, it makes sense that higher prices, larger mortgages, and an increasing share of higher-standard lenders would drive more creditworthy borrowers to take a larger share of the mortgage market.

Should you even bother if your score isn’t 700+?

While these trends may give the impression that homeownership is exclusively reserved for those with a 700+ score, that’s not necessarily the case. According to Homewise Co-Founder and CEO Jesse Abrams, many Canadians may not have a full understanding of the mortgage options available to them given the variability in the market and the range of factors that are considered in a mortgage application.

“There are many options out there across lender types that aren’t always considered when looking for a mortgage. Different lenders can offer a breadth of loan features for those with different credit histories and financial situations, but Canadians often pass on these options or don’t explore them. A misconception is that your credit score is the primary driver of your mortgage rate. It is a big part, but having an 820 vs. a 690 doesn’t always make as much of a difference in the mortgage options that are presented as one might think.”

Jean-Michel Klinkow, Vice President Mortgage Specialist at BMO, recommends mortgage applicants strive for a target score of at least 680 before applying. But Klinkow confirms that while a credit score is important, it’s not everything. “Your overall financial position is always reviewed for a mortgage application. It’s about credit history, credit capacity and utilization, net worth, and income. If you are strong in certain areas but have a bit of a lower score, lenders are able to work with you to find the right fit.”

More: How to get a mortgage with bad credit

How your credit score affects your mortgage

While lenders consider a multitude of factors when assessing your mortgage application, your credit score is nonetheless important when it comes to the type of lender you may work with, the interest rate you’ll receive, and how expensive mortgage insurance might be if you must obtain it.

Lender options

Your credit score can have a big impact on the type of lender you’ll work with. The large Canadian banks are considered the “highest quality” lenders, have some of the strictest lending standards, and generally prefer borrowers with higher credit scores. Credit unions are also considered to be high quality lenders, however they are often provincially regulated rather than federally regulated. Banks and credit unions are referred to as “A” lenders.

If you have poor credit or borderline credit, you may not qualify for an “A” lender mortgage and will need to work with a “B” lender. These lenders are quasi-regulated lenders. They are not directly regulated federally, but tend to follow regulations indirectly. Some examples of “B” lenders in Canada are MCAP, First National, and Home Trust. Aside from differences in regulatory oversight and the types of clients they tend to work with, “B” lenders are known to provide more flexible loan structures. Working with a “B” lender isn’t always a bad thing. But if you must do so due to a low credit score, you will likely pay a higher interest rate or will be subject to additional fees.

Those who qualify for neither “A” nor “B” lenders can still seek a private mortgage, which could come from a family member, other private individuals, or organizations like mortgage investment corporations (MICs). These mortgages typically only require a borrower to pay the interest on the loan (vs. interest and principal) and generally carry a term of one to three years. While private mortgages are a popular credit product used by those with bad credit, they are notorious for high fees and high interest rates, and are usually used as bridge financing that are leveraged until one’s financial situation improves enough to refinance for a traditional mortgage. It’s generally best to avoid private mortgages, unless the circumstances preventing you from qualifying for a traditional mortgage are only temporary, and you can comfortably support the higher loan costs until you’re able to refinance.

Interest rates

Lenders base their interest rates on how risky they perceive a borrower’s credit profile to be. Riskier borrowers are charged higher interest rates as a means of compensation for the lending risk. Although the target minimum credit score to qualify for a mortgage is 650, borrowers with that score are unlikely to access the best mortgage rates.

According to Abrams, “Lenders generally have an overall threshold for their applications. Some are ok with 650 and some require 720+ to get their best options. To be safe, a borrower should try to get above 700 if they are looking for the best rates.”

Data from Borrowell confirms that scores of 680+ are needed for the best mortgage rates in 2022, and that for every 20 points your credit score moves, you are likely to see small changes in the interest rate you’re offered.

But keep in mind that a lender’s risk assessment might be based not only on their proprietary credit algorithms, but also on the lender-borrower relationship. “Building a banking relationship with your lender or financial institutions is very important and can be a big help when it comes to your interest rate. Most people don’t know how important this is and how as a customer, you always have room to negotiate rates based on your relationship,” Klinkow notes.

In summation, to maximize your chances of getting the best rate, try to get a credit score as close to 700 as possible and make sure you negotiate.

Mortgage default insurance

In Canada, if you’re unable to put down cash for at least 20% of the value of the home you’re trying to purchase (your down payment), you must obtain mortgage insurance. This type of insurance is designed to insulate lenders from potential credit losses and will ultimately add to your monthly payment and carrying costs (approx. 2.8% to 4.0% of mortgage amount). In July 2021, CMHC changed its minimum credit score requirement for mortgage default insurance from 680 to 600, which lowers the eligibility threshold for CMHC insurance. Default insurance is also available through private providers like Genworth and Canada Guaranty.  According to both Abrams and Klinkow, when buyers must explore an insured mortgage with a low credit score, the costs and terms to do so can be highly prohibitive and restrictive.

Related: Mortgages 101: A guide to getting your mortgage

How do I access my credit score before applying?

You can access your credit score multiple ways. Canadians are entitled to one free credit report per year (called a Consumer Disclosure) from either Equifax or TransUnion (delivered by mail or online). If you can’t wait a year for this type of report, you can access a free report through companies like Borrowell or Credit Karma. Some banks also offer the ability to view credit scores online.

A credit score check in the context of a mortgage application qualifies as a hard check. These types of checks affect your credit score and show up on your credit history. According to Equifax, however, multiple mortgage applications made over a certain window of time (14 days to 45 days) are generally counted as one inquiry, depending on the credit scoring model used.

Related: Does checking your credit score hurt your credit?

What are your options if you don’t have a strong score?

Make a bigger down payment

If your credit score is borderline, increasing the size of your down payment may help your chances of getting a mortgage. A down payment of 20% is required to avoid mortgage insurance, but putting even more down up front helps reduce risk from the perspective of the lender, therefore increasing the attractiveness of your application.

Related: 6 ways to save money for a house

Eliminate your outstanding debt

As Klinkow notes, “If you have significant income, have assets, but have maxed out the limit on all of your credit products, it still makes your application more difficult to approve, as high revolving credit balances will negatively impact your credit score.” Improving your overall debt-to-income ratio will improve your chances of being approved for a mortgage (and it’s one of the best ways to improve your credit score in the process).

Get a co-signer or joint mortgage

Partnering with another individual who has a good credit score or gaining a guarantor will improve your application. If the lender knows that others with a stronger credit history are legally obligated to shoulder the cost of the loan in the event that the primary applicant can’t make their payments, the lender will be far more likely to extend that loan. “When you have a co-signer, that co-signer is evaluated in terms of their ability to service the loan. The two applicants’ credit profiles are looked at in tandem and if one has a significantly higher score than another, it is a big help. It’s not necessarily a matter of averaging the two scores. It’s more about looking at the strength of the combined application,” according to Klinkow.

Shop around

If you have a low credit score, odds are that obtaining a mortgage from a big bank will be off the table, and you’ll need to cast a wider net. In this case consulting a mortgage broker or an online mortgage comparison service like Homewise can save you from having to sift through the many different Canadian lenders one by one. Comparison platforms can see rates across a number of mainstream and alternative lenders simultaneously, so they will be a key enabler if you want to shop around in an efficient manner.

Should you apply if your score is borderline?

Owning a home is a dream for many Canadians, one that unfortunately is increasingly out of reach. If you want to get into the market but your credit score is on the edge, first pause to evaluate why. Have you hit the limit on the amount of credit available to you (i.e. you’re maxing out your credit utilization)? Are you missing payments on your loans or bills? Are you an overzealous credit card churner?

If you have a strong financial foundation but some unfavorable credit habits due to lack of organization or discipline, get them in order before you apply. A borderline score can be improved with small changes, and that can significantly alter your ability to afford the home you want.

That said, in some circumstances it might make sense for a borrower with a lower credit score to obtain a mortgage from an alternative or private lender. If you’ve thoroughly considered the reasons why you must obtain a short-term mortgage instead of a traditional mortgage; have put an attainable plan in place to close the gap between where you are vs. where you need to be; and aren’t stretching yourself to the limit financially, then that type of financing option might be worth it for you. You can improve your score by steadily paying off the mortgage, and then eventually refinance into a more affordable loan once your score is in better shape.

That said, don’t let yourself get caught up in the idea that if you don’t buy now, you will never be able to—especially if it means putting yourself in a compromising financial position. Speaking from personal experience, being responsible for a house and all the associated costs is not an easy financial undertaking. If you are dreaming about a home but would really need to stretch yourself financially to pay for one, just remember this key statistic: 32% of Canadian homeowners report not being able to live their lives normally because of the costs associated with homeownership (being “house poor”); and almost half (45%) of all households won’t be able to cover their living expenses in 12 months without taking on more debt. You don’t want to put yourself in a difficult financial situation just to own a home. You may end up resenting it.

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Aubrey Chapnick is a side hustling freelance personal finance, business education, and careers writer who contributes to online and print media outlets in Canada like The Globe & Mail. He holds an MBA from the University of British Columbia and has several years of experience in the banking, investments, and technology industries. When not writing, he’s busy watching Formula 1, staying active, and managing his investment portfolio.

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