If you’re thinking of getting your first mortgage or you have to renew one, you may be looking forward to the all-time-low mortgage rates now available. But beware, those mortgages — and any mortgage — may be hard to get.
One thing you can do to avoid being left out in the mortgage-less cold is to check your credit score, and make it the best it can be.
Lenders have tightened up their requirements and the government has made it more difficult to get mortgage insurance, said Brian Peterson, president of the Mortgage Brokers Association of British Columbia.
Last summer, the federal government set new guidelines for which mortgages can receive government-backed insurance.
Under the new rules, set out in a Department of Finance backgrounder, the government will no longer insure 40-year mortgages. Also, while zero-down mortgages are still available, the government will only insure 95 per cent of those loans.
The government also set a credit score floor of 620 for potential borrowers, with a limited number of exceptions allowed. (Canada’s major credit-rating agencies use a scale from 300 to 900; the higher the number, the better your credit rating is.)
Peterson said the credit score floor has been reset at 600.
All mortgages in which the loan is more than 80 per cent of the property value require insurance. And lenders now sometimes choose to insure other mortgages at their own expense so they can sell them as part of an asset-backed security, Peterson said.
So while a borrower’s credit score is not the only criterion — lenders also want stable employment and a low debt load — it is an important one.
It’s a score people can improve.
There are two providers of credit scores in Canada, Equifax Canada and TransUnion.
Tom Reid, director of consumer solutions for TransUnion, has heard about cases where consumers who thought they had a good credit score are being declined for mortgages.
Reid recommends people aim to get their credit scores up to 750, and 47 per cent of Canadians are in that range.
Credit scores are based on reports lenders provide regarding loans they have made and their repayment. Lenders include credit card companies, retailers that have their own credit cards, and banks reporting lines of credit and auto loans.
For a good credit report, payments should be made on time, even if the payment required is small and almost not worth bothering, Reid said. And balances on credit cards should be kept below 50 per cent of the cards’ limit.
Keep applications for credit down to a minimum, except if you are shopping around for the best deal on a big purchase, Reid said. Potential lenders may think you are desperate for credit if you have a number of different companies checking your score at the same time.
Also have a mix of loans and credit cards to show you can manage debt, Reid said.
“It may be easier to manage [one loan] but it doesn’t show lenders that you have the ability to manage other types of credit with potentially higher payment obligations,” he said.
Also, before cancelling a credit card, think about whether keeping it could positively affect your score. If you’ve made the payments on time and have had the card for a while, you may be better off hanging on to it, and not using it. Once you’ve cancelled the card, you’ve also cancelled its positive credit history.
What hasn’t traditionally been included in credit reports is mortgages. But that’s changing with more financial institutions choosing to provide mortgage information, Reid said.
One problem some would-be borrowers may face is a lack of credit history. For them, Reid suggests starting with a credit card from a retailer as they are generally easier to get. Then make sure the payments are made on time.
The longer credit history you have, the better your score, so start early, Reid said.
The Financial Consumer Agency of Canada has helpful information about credit scores — how to read the reports and how to improve them — on its website here. Check out “For Consumers.”
