The current financial situation in Canada has been dubbed the “credit crunch” as global financial institutions felt the pinch and many companies have gone bust as a result of a lack of credit. This has filtered down to Canadian consumers and banks are now tightening lending criteria – even to customers who have good credit. But do you know what it means to have better credit?

We’ve designed a quick test to check your credit knowledge. Take a look at 5 different scenarios and check the answers at the bottom of the post.

Canadian credit test

1. If everything else was equal – who would have better credit?

Meet Cindy. She has a Visa credit card with a $5,000 limit and normally charges $4,500 to the card on a monthly basis. She is very vigilant and makes sure she always pays off her monthly balance.

Meet Jim. He has a $15,000 limit on his Platinum Visa card and usually has a monthly average balance of about $10,500. Jim is more relaxed about his credit balance and only pays off the minimum payment he can get away with each month.

2. If everything else was equal – who would have better credit?

Frankie has over $250,000 in his RRSP accounts and over $150,000 in various savings accounts He also pays for everything with cash and doesn’t have any debt or credit cards of any kind.

Svetlana has 3 credit cards and routinely carries over $25,000 in debt. She only has total savings of $500, resulting in a negative net worth of $24,500.

3. If everything else was equal – who would have better credit?

Lisa just got a new job at the local burger joint for $8.50/ hour. Over the past 18 months she has had a credit card with a $2,000 limit and rarely carries a credit card balance in excess of $1,000.

Pattie is a medical doctor in the city and makes an average income of over $250,000/year. She’s had excellent credit for years but recently closed all her debts and put everything into a single, brand new loan.

4. If everything else was equal – who would have better credit?

Ashton has had a mortgage for over 20 years and the current balance stands at $50,000. He’s never missed any monthly payments and has no other debts or credit cards. He also uses his debit card frequently.

Richard has only 1 credit card and it has a $2,000 balance. He forgot to make a payment 8 months ago, and also missed a payment 3 years ago.

5. If everything else was equal – who would have better credit?

Flavio declared bankruptcy 6 years ago and was discharged for bankruptcy 5 years ago. He has a credit card with a $10,000 limit and an average balance of $4,000. 3 years ago he was in Italy on holiday and missed 2 monthly payments. He quickly made up for the mistake when he returned and has never missed a payment since then.

Pointdexter travels for work and is out of the country on business very often. As a result, he has missed many payments over the last 4 years. His latest missed payment was 3 months ago. He has a credit card limit of $10,000 with an average balance of $9,000.

Answers

1. Answer: Jim

Reason: Credit card companies feed their information to the credit bureaus once a month (as do all credit issuers). As a result, the credit companies can’t determine if the credit card balances are paid off in full or just partially. Cindy has a higher balance on her credit card (90%) than Jim based on percentage terms when compared to the credit card limit.

Jim’s credit card balance is only 70% of the limit. As a basic rule, you should always keep your credit card balance at less than 75% of its limit for it not to adversely affect your credit profile.

2. Answer: Svetlana

Reason: Your net worth is not provided to credit bureaus. If you don’t have any debts or use any credit, such as Frankie, you won’t have any credit history, so when a financial institution runs a credit check – it would come up empty! So it would be hard to get a mortgage at all. However, in Svetlana’s case, she should have a fairly easy time trying to get a mortgage as she’s built up a credit history.

3. Answer: Lisa

Reason: Your annual income isn’t reported to the credit bureaus, so the salaries included in the example were used to throw you off! Pattie closed all her credit card and other loans which effectively reduced here credit history in a very short period.

Tip: You should never close all your credit facilities in one go as Pattie did. If you wish to close a credit card, make sure you have a new active credit card that has been used for 12 – 18 months. In addition, with Pattie’s loan being so new, it would be right near her limit and would hurt her credit score.

4. Answer: Richard

Reason: Mortgages in Canada are not reported to the credit bureaus and we can’t seem to find any reason why this is the case, as they’re reported in the USA.

Ashton would be almost invisible to the credit bureau and they would assume he had bad credit – no credit = bad credit. He would find it difficult to find a mortgage versus Richard, who would have no problem.

Tip: In a marriage or common law relationship, it’s important for each person to have their own credit history as their mortgage will not be reported to either one’s credit bureau.

4. Answer: Flavio

Reason: It’s a trick question. Flavio, without a doubt, would have the better credit rating. However, banks will forgive a bankruptcy but never a missed payment after a bankruptcy, and this is what Flavio has. As a result, Flavio would find it difficult to qualify for a mortgage despite her very high credit rating.

Pointdexter would not find it difficult to get a mortgage.

True North Mortgage provides details on their “New to Canada” mortgage program to help people who have recently moved or relocated to Canada get a mortgage.

If you’ve ever lived abroad you know how difficult it is to get basic things that you take for granted in your own country such as a bank account, credit card, telephone services, etc. Over the last few years it’s become even more complex as there are now so many laws and regulations that are designed to prevent money laundering – it can be virtually impossible. Oftentimes, for those people who have recently arrived in Canada, it can be just as tricky to secure a mortgage in this country.

Thankfully, True North Mortgage is working with Genworth Financial and the Canadian Mortgage Housing Corporation (CMHC) to offer qualified homebuyers who have moved to Canada a mortgage with as little as a 5% payment and have outlined the steps and requirements below.

Approved mortgage types and properties

Acceptable home loan purposes for recent immigrants and people who have relocated to Canada are new home purchases, improvements and extended amortizations available up to 35 years.

There are a few restrictions on the type of properties that can be purchased such as a maximum of 2 units and one must be used as the principal residence, meaning you have to live in the property as your main home. It’s fairly flexible for the type of property you can buy as newly built houses and existing properties that are on the market are acceptable.

Loan-to-value ratio limits

The ‘Loan-to-value’ or LTV ratio as it’s commonly known is the amount of the property value less the down payment you can make over the property value. For example, if you were looking at a $100,000 property and had a $10,000 down payment (ie. $100K – $10K = $90K mortgage) the LTV would be 90% ($90K/$100K).

The maximum LTV ratio available to people new to Canada is currently 95%. 100% mortgages were available until October 2008 as the government stopped insuring $0 down payment mortgages in an effort to avoid a US style housing crisis and stop the so-called “sub-prime” mortgages from becoming a problem.

The table below outlines the LTV ratios and the insurance premiums you’ll have to pay to Genworth Financial, the mortgage default insurer, on top of the loan for the mortgage default insurance which protects the lender in case the mortgage holder isn’t able to make the payments.

Qualifications required

The following qualifications are required for a mortgage:

• Maximum GDS/TDS: 32%
• Maximum GDS/TDS including heating payments: 40%

GDS ratio stands for the “gross debt service ratio” and is the percentage of the gross annual income that is needed to cover the mortgage payments. The total payment includes the mortgage principal, interest payable, taxes and can include other expenses such as heating and condo fees.

TDS ratio stand for the “total debt service ratio” and is the percentage of gross annual income that is needed to cover mortgage payments and all other debts such as car loans, personal loans, credit lines and credit cards.

In addition, you must have:

• Moved to Canada within the last 3 years (36 months)
• Had at least 3 months of full time employment in Canada – there is an exemption available if you have been transferred through your work
• Already have a valid work visa or have already received landed immigrant status
• All your international debts and obligations must be included in the TDS ratio
• Rental income on foreign properties can be excluded from the GDS/TDS calculation

Necessary documentation

You will need to supply the following documents to the mortgage lender:

• A valid work visa or verification of landed immigrant status

Depending on the LTV you’re looking at you’ll need:

• 95% LTV: an international credit bureau
• 90% LTV: A letter of reference from a recognized financial institution, or 6 months of historic bank statements with active account operations and no non-sufficient fund charges
• 85% LTV: if you’re getting a guarantor to help you with the process, then you will only need to show a valid work visa and the proof of landed immigrant status, otherwise, the same documentation is needed as per the 90% LTV

Credit and Down Payment Guidelines

Please note that this program is not available to any foreign Diplomats in Canada or any other foreign politically appointed individuals who don’t pay income tax in Canada.

So if you’ve recently moved or relocated to Canada please get in touch with us and we’ll do our best to help you out.

True North Mortgage outlines the steps new home buyers should make when buying that first property.

Getting on the infamous property ladder and buying your first home is a life changing experience that can be both an exciting and exhausting process. As your home will be one of the biggest purchases of your lives, unless you’re one of the lucky few jet-setting around in your customized Boeing 747, it’s one of the more important decisions you’ll make as well. A good mortgage broker can help simplify the process and that’s what they specialize in. A good mortgage planner can help to explain the options available to you, recommend the various financing solutions in the market and get your first home loan approved at the lowest mortgage rate and the best terms for your own situation.

Canadian mortgage brokers such as True North Mortgage, work with all the major Canadian mortgage banks including ING DIRECT, TD Canada Trust and FirstLine on a daily basis and have an in-depth knowledge of their products and terms and best of all their service is free! Brokers are compensated by the lenders once a mortgage is completed but work for you.

Their in-depth knowledge of the mortgage market allows you work with an expert and can help speed up the home buying process. Finding the best mortgage rate is only one of the steps to securing a home loan, and they can help you get through the entire home buying process and this is one of the many value added services mortgage brokers in Canada can provide and can help first time home buyers through the mortgage process:

1. Pre-Approval

This involves finding out how much you can borrow and what rate you qualify for and this depends on many factors based on your financial situation including your credit history, current level of debt and income. True North provides pre-approvals with a 120 day rate guarantee, so you can hold on to that rate, even if it changes over the next 4 months.

2. Buying your home

Once you’ve found the property you’re going to buy, try and leave a condition day, and give yourself at least 1 week for time to complete all the financing that you’ll need. This gives you some breathing space and is a good time to get the home inspection done.

3. The Paperwork

Your mortgage broker can help explain all the details of the paperwork that needs to get done for the mortgage lender.

Documents that will be needed include:

For your home:

• Property listing copy
• Copy of the signed offer to purchase
• Property details including the legal description (for property tax purposes)
• Lawyer or notary details
• Heating costs, property taxes and condominium fees, etc and this info is usually listed on the real estate agent’s property registration form
• Well and septic tank certificates (if applicable – rural properties)

Employment related documents:

• Confirmation of your employment and income
• Confirmation from your previous employer, if needed
• If you’re self-employed, your financial statement and notice of assessment for the last three years
• Additional income confirmation

Financial documents:

• Pre-approved mortgage loan certificate
• Confirmation of your first payment – if the 1st payment is a gift, you’ll need a letter from the provider to specify that the funds don’t need to be re-paid
• A list of assets and liabilities
• Bank account number

4. Lawyer

Then all the paperwork can be sent to your lawyer.

5. Property registration

Your notary or lawyer will then pay the house vendor, then they will register the property for you in your name, and finally you’ll receive the deed and give you the keys – then the property is yours!

Each mortgage application is different for each person’s situation and a mortgage broker can make this a much smoother, easier process. When you buy your first home, you’ll need money for a down payment, especially since the Canadian government stopped insuring 100% or $0 deposit mortgage back in October 2008. The down payment amounts can vary but generally you should make a payment of at least 10% of the purchase price, but you can down to as low as 5%. You should start off with small monthly payments to make sure you don’t over-extend yourself, and many lenders allow you to pay off lump sums of up to 20% of the mortgage value annually, so there still are payment options available to you.

Government mandated high ratio insurance premiums