To take advantage of the best conditions at the best interest rates, good financial health is paramount. How is yours doing? Is it healthy or on life support? Here's how to evaluate and improve it.

Your credit rating

Your credit rating, also known as your credit score, is the result of the evaluation of your credit history and your ability to repay your debts. This number represents your reliability regarding credit. This number is obtained after a credit reporting agency performs a detailed analysis of your credit report. In Canada, you can make a request to either TransUnion or Equifax.

Is your score above 680? Great! You are considered a low-risk borrower. You can get better terms and better interest rates.

Your score is below 600? You are considered at risk. Your loan may be refused or you may get less favourable conditions and interest rates.

Rest assured: all is not lost. There are many ways to improve your score:

• Always pay your bills before the due date. Late payments lower your credit score.
• If not already done, get a credit card that you will use responsibly to build and improve your score.
• Never use more than 75% of the amount available on your card or line of credit. Ideally, remain below 50%, or even better, 30%.
• Keep your old bank account open. The older your account, more it will positively influence your rating, provided it remains minimally active. If it hasn’t been used in a long time, it won’t be considered when calculating your score.

Your debt amortization ratios

There are two types of debt amortization ratios: Gross Debt Service (GDS) and Total Debt Service (TDS). These ratios help lenders determine the mortgage amount that you can to assume based on the monthly repayment of your debts, your monthly expenses and your income.

The gross debt amortization is the percentage of your income to pay for your housing costs, which are:

• The mortgage,
• Municipal and school taxes (over 12 months)
• Heating costs,
• Condominium fees, if applicable.

GDS = monthly housing costs ÷ monthly gross income x 100

For its part, total debt service is the percentage of income allocated to housing costs, plus all your other monthly obligations.

TDS: (Monthly housing costs + automobile loan + credit card + student loan + child support) ÷ gross monthly income × 100

To be eligible for mortgage insurance, you will need to get a GDS ratio of 39% or less and a TDS ratio of 44% or less.

Down payment

Most of the time, the Canada Mortgage and Housing Corporation (CMHC) requires a down payment from the buyer. The higher it is, the more it will reassure your bank about your ability to pay your monthly payments.

Credit rating, debt amortization ratios, down payment... Still too complex? Contact us and we will help you better understand these abstract concepts and perform the calculations for you.