Scoring the Best Rate on Your Mortgage

30 May 2024

Scoring the Best Rate on Your Mortgage

I don’t care what the cost is! Said no one… ever. When purchasing property, the main factor that influences the cost of borrowing, or the mortgage is the interest rate. In this economy, everyone is looking to save their coins where possible. But did you know that you can save on your monthly mortgage payment by considering the components that affect your credit score?

When venturing into the world of real estate investment, be it for purchasing residential or commercial properties, earning rental income, or flipping houses for profit, understanding how your credit score impacts the financing process is essential!

It is widely known that a bank mortgage is a commonly used method for financing real-estate acquisitions. Before approving your mortgage, financial institutions will carefully review your credit history which significantly influences the bank’s decision to lend. Lenders typically assess a borrower’s credit score by obtaining a credit report from a credit bureau. 

So, you probably have lots of questions about credit scores: What exactly is a credit score? How is it assessed? How does it impact your interest rate?

Let me break it down for you. A credit report evaluates various factors including your existing debts, your history of on-time payments, the variety of credit accounts that you hold, the duration of your credit history, and any new credit inquiries made. There are five factors that you’ll have to manage effectively to maintain a good credit score and in turn, be able to grab the best interest rate on your mortgage. By simply managing these, you could save thousands of dollars on your property purchase!

• Payment history

As the saying goes “Timely return of a loan makes it easier to borrow a second time”.  As a real estate investor, to avoid a negative credit history you must have a clear understanding of your payment patterns and ensure timely repayment of your debts. Your payment history plays a crucial role in determining your credit score. Lenders will analyse this history to assess your ability to repay a new mortgage. 

By effectively managing your payment history, you can enhance your likelihood of loan approval, secure favourable terms, and more. If you have a history of missing or making late payments, it can negatively impact your credit scores and by extension your ability to be considered creditworthy. If your credit score has already been impacted negatively……don’t worry too much as you can still turn the situation around and improve your score by ensuring timely payments going forward.

• Existing debts

Your credit score is affected by the total sum of debt owed and your ability to repay the debt. To improve your creditworthiness for a mortgage application, it is important to make a detailed list of all debt accounts, clear closed loans from your report and focus on clearing loans causing the most strain (i.e. those with the highest interest rates). Having multiple outstanding debts could hinder your chances of approval, limit your borrowing amount, and affect the interest rate that you are offered. 

How can you manage these risks? Through close monitoring of your debt accounts, you can create a strategy to reduce your debt by prioritizing balances with the highest interest rates. Having less debt improves your debt-to-income ratio, making you eligible for a larger mortgage loan. While decreasing your debt could result in a short-term decrease in your credit score since you will be managing less debt, making timely payments consistently on any outstanding debt will eventually raise your score in the short to medium-term and enable you to preserve your creditworthiness.

• Credit Mix

If you’re not always clear on accounting jargon you may be asking yourself what exactly is a credit account?  A credit account is an account established by a lender that allows the borrower to obtain funds now and repay them later. There are three main types of credit accounts that may be available to you as a real estate investor: revolving credit, instalment credit, and open credit. Revolving credit includes credit cards, personal lines of credit, and home equity lines of credit. Instalment credit refers to loans like student loans, mortgages, auto loans, and personal loans. An open credit allows borrowers to borrow up to a maximum limit but requires full repayment each month, such as utility bills and charge cards. 

Demonstrating a mix of credit accounts and making timely payments shows financial responsibility to creditors. However, having too many credit accounts can complicate expense management and payment tracking, so it is best to avoid accumulating too many loans too quickly, especially as a first-time borrower, as this may negatively impact your credit score. 

• Length of credit history

When seeking to secure financing from a lender, the duration of your credit history plays a crucial role in determining your credit score. A longer history, especially with positive payment records and no delinquencies, is advantageous. This includes the age of your oldest and newest credit accounts, as well as the average age of all credit accounts. Lenders may be concerned by a short credit history as this does not provide as much insight into your credit behaviour. A longer history shows creditors that you can repay debt and are a reliable borrower. If you already have a well-managed long credit history, you are on the right track to achieving a higher credit score!

• New credit inquiries 

Each time you apply for credit, it counts as an inquiry. If a lender does a hard inquiry on your credit report when you apply for a new credit line, it could impact your credit score. Hard inquiries are typically done by retrieving your credit report from one of the three main Credit Bureaus in Jamaica, which are EveryData Jamaica (formerly CreditInfo Jamaica), CRIF Information Bureau Jamaica Limited, or Credit Information Services Inc. Unlike soft inquiries, hard inquiries can cause a small reduction in your credit score. When applying for a bank mortgage, it is crucial to avoid making excessive credit inquiries if you are not sure that you will be accessing the credit since it may signal that you are accumulating debt.

Now that your credit score is no longer a mystery, don’t make a mistake that could cost you thousands of dollars. By simply utilizing these tips, you’ll be able to score the best rate on your mortgage! 

Contributed by:
Daveyan Hill Accountant
PROVEN Properties