Interest rates have risen, triggered by the Bank of Canada’s efforts to curb inflation. And Canadians are feeling the effects.1
Why has the impact been so widespread? In part, due to the rising popularity of variable rate mortgages. According to the Canada Mortgage and Housing Corporation, in the latter half of 2021, the majority of mortgage borrowers opted for a variable over a fixed interest rate.2
Variable mortgages are typically pegged to the lender’s prime rate, which means they are immediately affected by rising interest rates. Homeowners with fixed mortgages aren’t impacted as quickly because their interest rate is locked in, but they will face higher rates, as well, when their mortgages are up for renewal. And many homebuyers are finding it increasingly difficult to afford or even qualify for a mortgage at today’s elevated rates.
Fortunately, there are steps you can take to strengthen your position if you have plans to buy a home or renew an existing mortgage. Try these eight strategies to help secure the best available rate:
1. Raise Your Credit Score
Borrowers with higher credit scores are viewed as “less risky” to lenders, so they are offered lower interest rates. A “good” credit score typically starts at 660 and can move up into the 800s.3 If you don’t know your score, you can access it online from Canada’s two primary credit bureaus, Equifax and Transunion.4
Then, if your credit score is low, you can take steps to improve it, including:5
- Correct any errors on your credit reports, which can bring down your score. You can request free copies of your reports through the Equifax and Transunion websites.
- Pay down revolving debt. This includes credit card balances and home equity lines of credit.
- Avoid closing old credit card accounts in good standing. It could lower your score by shortening your credit history and shrinking your total available credit.
- Make all future payments on time. Payment history is a primary factor in determining your credit score, so make it a priority.
- Limit your credit applications to avoid having your score dinged by too many inquiries. If you’re shopping around for a car loan or mortgage, minimize the impact by limiting your applications to a two-week period.
Over time, you should start to see your credit score climb — which will help you qualify for a lower mortgage rate.
2. Keep Steady Employment
If you are preparing to purchase a home, it might not be the best time to make a major career change. Unfortunately, frequent job moves or gaps in your résumé could hurt your borrower eligibility.
When you apply for a new mortgage, lenders will typically review your employment and income history and look for evidence that you’ve been financially stable for at least two years.6 If you’ve earned a steady paycheck, you could qualify for a better interest rate. A stable employment history gives lenders more confidence in your ability to repay the loan.
That doesn’t mean a job change will automatically disqualify you from purchasing a home. But certain moves, like switching from corporate employment to freelance or self-employment status, could force you to delay your purchase, since lenders will want to see proof of steady, long-term earnings.6