When you purchase a home with a mortgage in Canada, it’s crucial to remember that qualifying for a mortgage renewal at the end of each mortgage term is not a given. While many homeowners are typically approved for a renewal, there are situations where a mortgage renewal can be denied. Understanding the factors that influence your renewal approval can help you avoid any surprises when the time comes.
Renewing your mortgage in Canada is not the same as qualifying for a mortgage in the first place. The rules are generally more lenient, especially when you stick with the same lender. Most lenders are motivated to help you renew your mortgage since keeping your business is usually in their best interest. However, if you choose to switch lenders, it’s important to know that the process may require you to meet stricter financial criteria, including passing the mortgage stress test.
Table of Contents
Mortgage Renewal Denials in Canada
Getting a mortgage in Canada is an important milestone, but the process doesn’t end once you’ve secured your mortgage. At the end of each mortgage term, you will need to renew your mortgage, and unfortunately, there is no guarantee that your mortgage renewal request will be approved. Lenders will review various factors to determine if you are eligible to keep your existing mortgage.
Here are some key factors that lenders consider when assessing mortgage renewal applications:
1. Payment History
One of the first things a lender will look at when deciding whether to approve your mortgage renewal is your payment history. If you have missed payments or have outstanding balances on your mortgage or other forms of debt, you may face challenges in getting your mortgage renewed. It’s not just mortgage payments that matter; missed payments on loans, credit cards, and other debts will also be taken into account.
2. Income
As life circumstances change over time, lenders will assess whether your income has remained stable. If your income is too low or if you’re unemployed, this could impact your mortgage renewal approval. Lenders want to ensure you have a steady and reliable source of income to support your mortgage payments.
3. Credit Score
Some lenders may rerun a credit check during the mortgage renewal process. While not all lenders will do this, maintaining a good credit score is still important. If your credit score has dropped significantly or falls below the lender’s requirements, it could impact your chances of renewal.
4. Debt-to-Income Ratio
Lenders also look at your debt-to-income ratio, which compares your monthly debt obligations to your monthly income. If this ratio is too high, it may indicate that you’re stretched thin financially, which could lead to a mortgage renewal denial. This typically happens if you’ve taken on more debt since your initial mortgage application.
What Happens If Your Mortgage Renewal Is Denied?
If your mortgage renewal is denied and you can’t find a lender willing to work with you, or if you choose not to renew, there are a couple of scenarios that could unfold:
1. Open Mortgage
If your lender denies your mortgage renewal, they might offer you an open mortgage. While this allows you to pay off your mortgage early without penalties, the downside is that the interest rate will likely increase, and you won’t have any say in the renewal amount.
2. Mortgage Repayment
In more extreme cases, if you can’t secure a renewal at all, the full amount of your mortgage could become due immediately. This could force you to sell your home in order to pay off the mortgage balance.
How to Qualify for a Mortgage Renewal in Canada
The process of qualifying for a mortgage renewal largely depends on whether you are renewing with your current lender or shopping for a new one. If you decide to stay with the same lender, the process is usually straightforward. You may just need to agree to the new terms and sign a new mortgage contract.
However, if you’re looking to switch lenders, you will need to meet their specific requirements, including passing the mortgage stress test. Lenders will want to ensure that you can afford your mortgage payments, meet the credit requirements, and maintain a manageable debt load. If you have a CMHC-insured mortgage, you’ll need a minimum credit score of 680 to qualify for a renewal.
The Impact of a Denied Mortgage Renewal on Your Credit Score
While being denied for a mortgage renewal doesn’t directly affect your credit score, applying for a renewal or a new mortgage can temporarily lower your credit score by 5 to 15 points. If you apply for multiple mortgages in a short period, only one of those applications will affect your score, though all of the inquiries will be noted on your credit report.
Employment and Its Role in Mortgage Renewals
Your employment status and history can also affect your mortgage renewal application. Lenders prefer applicants who have stable, long-term employment. If you’ve recently changed jobs or are unemployed, this can raise red flags, even if your income remains consistent. However, if you have a strong history of stable employment, a recent job change won’t have as much impact—especially if it comes with a pay increase.
How to Secure a Mortgage in Canada with Bad Credit: A Step-by-Step Guide
A Comprehensive Guide to Land Transfer Taxes in Ontario
Class-Action Lawsuit Over Car Insurance Could Lead to Payouts for Canadian Drivers
What to Do If Your Mortgage Renewal is Denied: Regional Differences
No matter where you live in Canada, there are steps you can take if your mortgage renewal is denied. Start by speaking with your lender to understand the reason for the denial. In some cases, the issue may be something minor that you can resolve before the renewal deadline. If your income has decreased or if interest rates have increased, you could consider extending your amortization period to reduce your monthly payments.
You can start the mortgage renewal process as early as four months before your current term expires. This gives you time to address any issues that could impact your renewal approval. If your credit score is an issue, you can use this time to improve it, making you a more attractive candidate for renewal.
Exploring Alternative Lenders
If you can’t secure a mortgage renewal with your current lender, there are alternative options available. These include smaller banks, credit unions, trust companies, private lenders, and mortgage investment companies. While these alternative lenders may offer higher interest rates, they may be more flexible and willing to approve your renewal application, even if your credit score is less than perfect.
1. Smaller Banks
While smaller banks may not have the same extensive track record as larger banks, they can offer quicker approval and lower interest rates. They might be a good option if you’re looking for a fast renewal.
2. Credit Unions
Credit unions are often more flexible than traditional banks and may offer lower interest rates and more personalized service. They may also be more lenient with credit score requirements.
3. Trust Companies
Trust companies, which are considered B lenders, offer mortgages to clients who might not qualify with a traditional bank. They may have higher interest rates, but they could still be a good option for mortgage renewals.
4. Private Lenders
Private lenders also fall under the B lender category. They are generally more willing to approve mortgage renewals for clients who have trouble qualifying through traditional channels, but they typically charge higher interest rates and fees.
5. Mortgage Brokers
If you’re unsure where to start, a mortgage broker can help. They have access to many different lenders, including non-traditional ones, and can negotiate on your behalf to help you get the best rate possible.
Final Thoughts on Mortgage Renewals in Canada
A denied mortgage renewal doesn’t mean you’re out of options. Whether you choose to work with your current lender or explore alternative lenders, there are ways to secure the renewal you need. Start your renewal process early to give yourself enough time to resolve any issues that may arise. With the help of a mortgage broker or alternative lenders, you can still find a solution that fits your financial needs. Remember, selling your home should always be your last resort.
One thought on “What to Do If Your Mortgage Renewal Is Denied”