Beacon Score Basics for Mortgage Hunters

2/14/2009 by Canadian Mortgage Trends

Your Equifax Beacon Score tells lenders how much of a risk you are, and hence it determines how much you’ll pay for your next mortgage. So it’s important to know what affects it.

Beacon scores range from 300 to 900 (a perfect score). The average Canadian adult has a Beacon near 700.

Many people think you need to be in the 800′s to get great mortgage rates. That isn’t the case. Only 11% of Canadians rank above 800, and it’s virtually unheard of to see a Beacon near 900. All you really need is 680-700 to get the best mortgage rates. Even 600 can get you a decent enough deal if you can prove income and haven’t had any delinquencies for at least a last year.

As of October 15, 2008, 600 is the minimum credit score for insured mortgages. That means you’ll need at least a 600 score to qualify for good rates on mortgages with less than a 20% down payment.

If your score is below 600, you’re what lenders call a “B” client (i.e. there’s issues with your credit that banks won’t like). 1 out of 5 Canadians are in this boat, but don’t despair!. Your credit can be fixed and there are still lenders willing to give mortgages to the credit challenged if you have a big enough down payment. We’ve seen deals get done with Beacons as low as 480!

Also keep in mind, the exact score needed depends on the type of mortgage you require. For example, mortgages for the self-employed, or for rental properties, often require higher scores.

Here’s a table showing the approximate effect of different Beacon scores on mortgage interest rates. This is based on our enecdotal experience and not empirical data. But it gives you a rough sense for how rates go up as your Beacon score goes down.

Assuming you want to improve your credit (and who doesn’t?) you should know how the Beacon formula is calculated. Here are the main criteria:

While no one knows the exact formula (except the inventor, Fair Isaac Corporation), Beacon scores are roughly based on:

Component	Weighting	Notes
Payment History	35%	Factors in the recency of, and number of, payments over 30 days late, collections, judgments, and bankruptcies. A single 30-day late payment can drop your score 15-20 points.
Current Debts	30%	Considers how much you currently owe (in absolute terms and compared with your credit limits), how many creditors you owe money to, and how much you could owe if you maxed all your available credit.
Age of Accounts	15%	The longer your accounts have been opened the better. You generally need at least three accounts over one year old.
Type of Credit	10%	Bank loans, credit cards, and revolving credit accounts all impact you differently.
Credit Enquiries	10%	Numerous credit applications in the past 12 months is a no no. This is a big benefit of mortgage brokers, who pull your credit only once for multiple lenders.

Besides the obvious (bankruptcies, judgments, etc.) the top Beacon killers are:

• Payments over 30-days late
• Maxing out credit cards (i.e. using over 70% of a high credit limit)

If you have a lot of maxed out cards, bring them at least below 70% of their limit (Below 50% is better. Below 30% is best). Your credit score can jump considerably in as little as a month.

The moral is, know your credit score and manage it carefully. Over 70-80% of Canadians have mistakes on their credit report. Don’t be afraid to check yours!

Pre-Approvals: A Dying Breed?

Silver Linings of Recovery in Sight

Canada’s housing market is humming along with sales activity increasing 11% from the previous month, the largest monthly gain in more than five years. Low mortgage rates, improved affordability and greater choice of inventory have helped more renters become buyers. With sales activity rising strongly and new listings trending downward, Canada continues to move toward balanced supply and demand conditions. Home building recorded its first broadly based increase since October last year, which is good news as this sector will hopefully cease to be such a drag on the economy.

The housing market was not the only bright spot – the Organization for Economic Cooperation and Development (OECD) said their composite leading indicator showed tentative signs of recovery in Canada. Their data indicates that Canada’s economy may be bottoming out and is likely to start heading up. Consumer confidence has been increasing for the last three months and currently stands at the highest level in 15 months.

The strengthening U.S. and international demand for manufactured and commodity-related products should help lift Canada’s economy. However, a strengthening Loonie could serve as a counterinfluencing factor.

The Numbers That Drive Real Estate

Home Sales (In Thousands)

Sales activity increased 11% from the previous month. This was the largest monthly increase in more than five years. 70% of local markets saw an increase in sales. Calgary, Vancouver, Montreal, and Toronto accounted for most of the increase.

Average Home Price In Thousands

Home prices increased 6% from the previous month but still remained slightly lower than the same time last year. Record home prices were seen in Saskatchewan, Manitoba, Quebec, and Nova Scotia.

Inventory (Sales-to-Listings Ratio )

The supply of homes continued to shrink. There were 21% fewer new listings in the market in April when compared to the same time last year. With sales activity rising strongly and new listings trending downward, Canada continued to move toward balanced supply and demand conditions

Sales-to-listings ratio is an indicator of price pressure in the home market. (Data released on May 15, 2009)

Source: Conference Board, Canadian Mortgage and Housing Corporation, The Canadian Real Estate Association

Mortgage Rates Average for: 25-Year Amortization, 5-Year Term

Mortgage rates stood at 5.25% last month. This was 1.4% lower than the same time last year and .2% below where it stood when the Bank made the latest rate cut on April 21.

It is, of course, important to note that these are the posted rates, and not the deepest discount rates available, which currently run approximately 1.5% below the rates above.

Recent Government Action

Government Rescues General Motors

A comprehensive restructuring plan was approved on June 1 after General Motors failed to get its bondholders on board.

While the additional details on the restructuring gets ironed out, the massive rescue plan by the Canadian and U.S. governments will yield a majority ownership in excess of 70% between the two governments. The $9.5 USD billion in aid from the Canadian government will translate into a 12% stake in the “New GM.” This represents the largest corporate rescue in the history of Canada.

Typically, financial institutions step in to provide a company with funds through the restructuring process, but with the trouble in the financial sector, no institutions took interest leaving it up to the governments to provide $40 USD billion on top of the $20 USD billion the company already received.

The massive intervention bodes well for Canadian interest in the company by ensuring that the interests of Canada receive formal representation, and it protects the company from liquidation, saving numerous Canadian jobs. This action intends to support the auto industry; however, the 12% stake pales in comparison to the 60% majority held by the U.S. government.

Here’s the full presentation (it’s best if you view it in full-screen mode):

Well, I just got notice that Scotia’s 5 year closed mortgage rate is increasing as of June 3rd, 2009; all the way up to 3.99%.

I also note that the fees offered to brokers for placing mortgages have crept up; I guess it’s a way to incentivize mortgage agents and brokers to send them their business.

So, rate changes are a reality, although not much of a rise right now. Still, it’s time to lock in TODAY if you can.