How to Get the Best Interest Rate on Your Mortgage

If you’re looking to secure the lowest possible interest rate on your mortgage, you need to understand how different factors—like insurance, your credit score, and your income type—affect your eligibility. It’s not just about shopping around for rates; it’s also about ensuring you meet the qualifications for the best rates advertised. In this post, we’ll break down the key steps and insider strategies to help you land the most competitive mortgage interest rate.

1. Understand the Difference Between Insured and Uninsured Mortgage Rates

The lowest mortgage rates are typically reserved for insured mortgages. These rates are often the ones being advertised by lenders and brokers to attract borrowers.

What is an Insured Mortgage?

An insured mortgage means that you purchase CMHC insurance (Canada Mortgage and Housing Corporation insurance). This insurance protects the lender if you default on your loan and is typically required if your down payment is less than 20%. The premium is added to the principal amount of your mortgage, so you don't need to pay it upfront.

If you purchased CMHC insurance when you bought your home and haven’t refinanced to pull out additional equity, you may still qualify for these low insured rates.

However, if you’ve refinanced your mortgage (meaning you took out additional equity from your home), your mortgage becomes uninsured, which means you’ll only qualify for slightly higher rates.

2. Make Sure Your Credit Score Meets the Requirement

To qualify for the lowest uninsured mortgage rates, lenders evaluate your credit score, debt ratios, and income type. Let’s break down these factors:

Credit Score Requirements

When you apply for a mortgage in Canada, one of the most important factors lenders look at is your credit score. Your credit score reflects how well you manage debt, and it plays a key role in whether or not you’ll get approved for a mortgage—and at what interest rate. Let’s break down exactly how your credit score affects mortgage approval in a way that’s easy to understand.

What is a Credit Score?

A credit score is a three-digit number between 300 and 900. It shows lenders how trustworthy you are with borrowing money. In Canada, credit scores are provided by two major credit bureaus: Equifax and TransUnion. The higher your credit score, the better you look to lenders.

Credit Score Ranges:

800+: Excellent

720 – 799: Very Good

650 – 719: Good

600 – 649: Fair

Below 600: Poor

Why Does a Credit Score Matter for Mortgages?

Your credit score helps lenders decide two things:

1. Will you get approved for a mortgage?
2. What interest rate will you receive?

If you have a higher credit score, lenders will see you as a low-risk borrower, making it easier to qualify for a mortgage at the lowest interest rates. A low credit score means higher risk, so lenders may either:

1. Deny your application.
2. Approve you at a higher interest rate through a non-prime or private lender.

How Different Lenders Use Credit Scores in Canada

There are three main types of lenders, and your credit score affects which one you’ll qualify with:

1. A Lenders (Prime Banks):

• Require a credit score of 680+.

• Offer the best interest rates.

• Strict about income and debt-to-income ratios.

2. B Lenders (Alternative Banks):

• Accept credit scores between 500 and 679.

• Higher interest rates but more flexible with income and debt levels.

3. Private Lenders:

• No minimum credit score required.

• Approve borrowers with bad credit but charge higher interest rates.

How Credit Scores Affect Your Interest Rate

A higher credit score = lower interest rate.

Let’s say you’re applying for a $500,000 mortgage. If your credit score is 750, you may get an interest rate of 5%. But if your score is 620, the lender may offer you a rate of 6.5%. That small difference in rates could cost you thousands of dollars over the life of the mortgage.

What Happens if You Have a Low Credit Score?

If your credit score is below 680, it’s harder to get approved by the big banks. But don’t worry—here are your options:

• Apply with a B Lender: They offer more flexible approval but charge higher interest rates.

• Work with a Mortgage Broker: Brokers can help you find lenders that will accept your credit score.

• Improve Your Credit Before Applying: Pay down debts and make payments on time to boost your score.

How to Improve Your Credit Score Before Applying for a Mortgage

If your credit score is low, you can improve it before applying for a mortgage. Here are some simple steps to take:

• Pay Bills on Time: Consistent, on-time payments build your credit score over time.

• Reduce Credit Card Balances: Keep your balance below 30% of your credit limit.

• Don’t Apply for Too Much Credit: Too many credit inquiries can hurt your score.

• Check Your Credit Report: Look for any errors that could be dragging down your score.

How Long Does It Take to Improve Your Credit Score?

Improving your credit score can take 3 to 6 months with good financial habits. If you plan to apply for a mortgage soon, start working on your credit score now. Even small improvements can help you qualify for a better rate.

The Role of Credit Scores in Mortgage Approval

Your credit score is crucial when applying for a mortgage in Canada. A higher score opens the door to better mortgage options and lower interest rates with A lenders. If your score is lower, B lenders or private lenders can still offer solutions, but at higher costs.

If you’re worried about your credit score, working with a mortgage broker can make a big difference. They’ll help you find lenders who fit your financial situation and offer guidance on improving your credit score for better rates.

No matter where you stand, understanding how your credit score affects mortgage approval can help you plan smarter—and get closer to owning the home of your dreams.

3. Make Sure Your Debt-to-Income Ratios (GDS/TDS) Are Low

If you’ve ever applied for a mortgage or loan in Canada, you’ve probably heard the terms GDS and TDS. These are essential metrics that lenders use to assess whether you can afford a loan. While they may sound technical, the concepts are pretty straightforward. Let's break them down into easy-to-understand language.

What is GDS? (Gross Debt Service Ratio)

Think of GDS as a way for lenders to figure out if you can comfortably afford the basic costs of owning a home. It looks at how much of your income is being used to cover just your housing expenses.

GDS includes:

• Mortgage payments (principal + interest)

• Property taxes

• Heating costs (utilities)

• 50% of condo fees (if applicable)

GDS Formula:

GDS = (Mortgage Payment + Taxes + Heating + 50% Condo Fees) ÷ Gross Income

How GDS Works in Real Life:

Imagine you make $80,000 a year and have the following estimated housing expenses:

• Mortgage payment: $2,000/month

• Property taxes: $500/month

• Heating: $200/month

The total monthly housing cost = $2,700/month.

Annual housing cost = $2,700 x 12 = $32,400

So, your GDS ratio is:

GDS = $32,400 ÷ $80,000 = 40.5%

Lenders generally prefer a GDS of 39% or lower, meaning no more than 39% of your income should go toward housing costs.

What is TDS? (Total Debt Service Ratio)

TDS goes beyond just housing costs and looks at all your debts. This includes the same housing expenses as GDS, but it also factors in things like:

• Credit card payments

• Car loans

• Student loans

• Personal loans or lines of credit

TDS helps lenders understand how much of your income is being used to cover all your debt obligations.

TDS Formula:

TDS = (Housing Costs + Other Debt Payments) ÷ Gross Income

How TDS Works in Real Life:

Let’s use the same $80,000 income example. In addition to your housing costs, you also have:

• Credit card minimum payments: $300/month

• Car loan: $500/month

So, total monthly debt = $3,500/month (housing + other debts).

Annual debt = $3,500 x 12 = $42,000

Your TDS ratio is:

TDS = $42,000 ÷ $80,000 = 52.5%

Lenders prefer a TDS ratio of 44% or lower. If your TDS exceeds this, it suggests that too much of your income is being spent on debt, making it harder for you to handle additional financial obligations.

Why Your GDS/TDS Ratios Matter

Lenders use GDS and TDS ratios to ensure you aren’t stretching your finances too thin. These ratios help them determine:

1. How much you can afford to borrow
2. Whether you qualify for a mortgage or loan
3. If you can handle monthly payments without risk of default

If your GDS/TDS ratios are too high, the lender may either:

• Deny your loan application

• Offer a smaller loan

• Suggest a B lender or private lender if you don't meet the criteria for a traditional bank

How to Lower Your GDS and TDS Ratios

If your ratios are too high, here are some ways to improve them:

1. Reduce Debt: Pay off credit cards or loans to lower your monthly debt obligations.
2. Increase Income: A higher income can help improve both your GDS and TDS ratios.
3. Choose a Smaller Loan: Opt for a home or loan with lower payments.
4. Consolidate Debt: Use a home equity loan to pay off high-interest debts, which can reduce your TDS ratio.
5. Find a Co-Signer: A co-signer with better income or lower debt can improve your approval chances.

What’s the Difference Between GDS vs. TDS Ratio?

• GDS focuses on your housing costs only.

• TDS looks at your total debt obligations (housing + all other debts).

Both ratios help lenders determine how much of a financial load you can handle comfortably.

Typical GDS/TDS Ratio Limits for Lenders:

• GDS: Max 39%

• TDS: Max 44%

If your ratios are within these limits, you’re more likely to qualify for a mortgage with a prime lender. If not, you may need to explore other options like B lenders or private loans.

Understanding your GDS and TDS ratios is essential when applying for a loan or mortgage. These ratios ensure you don’t overextend yourself financially and help lenders feel confident in offering you the funds you need. If your ratios are higher than what lenders prefer, don’t panic—there are ways to improve them, and a mortgage broker can guide you through the process.

4. Your Income Type Matters

Your employment status also impacts whether you can access the lowest mortgage rates. Here’s what lenders look for:

If You’re Employed

• Conventional income (paystubs, T4s) is the most straightforward.

• You’ll need to show stable income with consistent pay stubs and employment letters to qualify for the best rates.

If You’re Self-Employed

Self-employed borrowers can still qualify for the best rates, but the approval process is more complex.

You’ll need to provide:

• Articles of Incorporation (if you’re incorporated)

• Business financials prepared by an accountant

• NOAs (Notice of Assessments) showing enough income to meet the GDS/TDS requirements

• Business bank statements to prove income

📌 Pro Tip: Being organized with your financial documents will streamline the approval process and improve your chances of securing competitive rates.

5. What if You Can't Qualify with a Prime Bank?

If your credit score is below 680 or your GDS/TDS ratios exceed the limits, you’ll need to explore other lending options.

Get a Mortgage from B Lenders

• B lenders are more flexible with credit scores and debt ratios.

• They accept GDS/TDS ratios as high as 50/50% (or sometimes 60/60%).

• They generally require a credit score of at least 550, but the interest rates will be higher than those offered by prime lenders.

Private Lenders

If you can’t qualify with a B lender, private lenders are another option. Private lenders don’t follow the same strict rules as banks, so they don’t have minimum credit score or debt ratio requirements.

However, their rates are much higher, and you’ll need a strong exit strategy to eventually refinance with a lower-rate lender.

Steps to Lock in the Best Mortgage Rate

Here are practical tips to help you secure the most competitive mortgage rate:

1. Improve Your Credit Score

• Pay down outstanding debts.

• Make all payments on time.

• Avoid applying for new credit before your mortgage approval.

2. Lower Your Debt Servicing Ratios

• Pay off small loans or credit card balances to reduce your TDS ratio.

• Consider consolidating debt with a lower-interest loan to improve cash flow.

3. Organize Your Documents

• Have all required financial documents ready, whether you’re employed or self-employed.

• A smooth application process can make a big difference when locking in a low rate.

4. Work with a Mortgage Broker

• Mortgage brokers have access to multiple lenders, including prime and B lenders, giving you more options.

• They can also help you negotiate better terms and find the right product for your financial situation.

Plan Ahead for the Best Mortgage Rates

Getting the best mortgage rate requires more than just shopping around—it’s about meeting the qualifications that lenders are looking for. If you’re applying with a prime lender, you’ll need a credit score of 680+, low GDS/TDS ratios, and organized financial documents. Self-employed borrowers may need to provide additional paperwork, but with proper preparation, they can still access competitive rates.

If your financial profile doesn’t meet prime lender requirements, don’t worry. B lenders and private lenders offer more flexible options, though at higher rates. Working with a mortgage broker can make the process smoother and help you find the best product based on your situation.

By boosting your credit score, managing your debt ratios, and organizing your documents, you’ll position yourself to secure the lowest possible rate—saving you thousands of dollars over the life of your mortgage.