As a member of the Wealth Trifecta, Sean Dhillon is an award winning CIBC Mortgage Advisor who has over $250,000,000 in lending experience to Canadians from coast to coast. I am commonly asked by my clients how their credit score affects their mortgage application. According to the Canadian Mortgage and Housing Corporation (CMHC) the Canadian Credit Score show lenders your ability to consistently pay off your past and current debts. Additionally, the credit score shows the lender your employment history, address, and personal financial information.
Many lenders have internal guidelines regarding interest rates they can offer to clients based on credit score. The difference between a decent credit score (generally 620 or higher in today’s market) or a low credit score (less than 620) determines if you are a candidate for a “prime mortgage rate” or “sub-prime mortgage rate.” Prime mortgages rates are those rates you generally see being offering by various lenders online, in the branch or in print. However, if you credit score is low, then you maybe only eligible for sub-prime rates. Depending on the type of house you purchasing, the mortgage amount and the area it is located in, sub-prime mortgages can as much as 1% to 4% higher than Prime mortgage rates.
For example, a $350,000 mortgage with 30 year amortization and a 5 year fixed term at 3.50% equals a monthly payment of $1566/mo. 57,806
If your credit score is low and you qualify for a sub-prime mortgage, you pay as little as 5.00%, which would equal to $1867/mo. A difference of $301 Principle and Interest.
Assuming you don’t break your 5 year term and don’t make any lump sum payments your 5 year total interest cost on a 5.0% mortgage would be $83,240. A rate of 3.50% has a total 5 year interest cost of $57,806. This is a difference of $25,434.
You’d be paying an extra $25,434 because you didn’t have a high enough credit score to qualify.
So, how do you improve your score to avoid hefty interest charges?
First of all always make your minimum payment required of your credit facility such as credit cards or loans. Try to make the payment within the windows of payment opportunity to avoid any late charges and late payment recordings on your credit report. How?: Setup automatic pre-authorized payments from your bank account to your credit facility.
If your overall monthly payments are hindering you from qualifying for a loan, then try to apply for a consolidation loan which will lower your overall monthly payment. Make sure the consolidation loan is activated right away and pays off your existing debt. It takes up to 30-31 days (or the next payment cycle) before the new consolidation loan payment appears on your report and the other past credit facilities disappear. You will start to see your score improving
Finally, if you have the time to get a pre-approval allow the Mortgage expert to structure your outstanding loan payments in the manner that best fits the type of home you are purchasing. Managing your credit before the actual application is made is the key difference between an approval or not in most cases as well.
Hot tip to improve your credit score: Order a copy of your credit score before you make your application and review the loan amounts and payments. If there are any errors, and there usually are (Canadian Student Loan departments I’m looking at you), then order an investigation from Transunion or Equifax. The investigation will look into the mistakes made by the lenders and will follow up with them to make sure they are erased from the report. For example, many Canadians apply for those “ 1 year do not pay interest “furniture credit cards. Sometimes if you pay them off within the year the payment may not disappear from your credit report on time.
For further information, please do not hesitate to call/email.
Mortgage Advisor, CIBC Mortgages and Lending
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