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Can a bank deny mortgage renewal in Canada?

by Corben Grant on 09 Jun 2022

When your mortgage reaches its term, even if you haven't paid it off yet, you’re going to have to renew your mortgage. This is a pretty standard part of having a mortgage, but it isn't something that should be taken for granted. In fact, did you know that just because you were approved for a mortgage in the past, that doesn't automatically qualify you to renew your mortgage? This is important to know as a lot can change between when you first started your mortgage and when it's time to renew. And, if you are surprised by a denied renewal, it can be a pretty shocking experience.

You may not even realize that being denied a mortgage renewal is possible or even understand why you were denied in the first place. Even worse, you may now be scrambling to figure out what to do after a mortgage renewal denial. 

There are a number of options available to mortgage borrowers who have had their renewal denied. Some may be easy to do while others may require you to take more drastic measures. Continue reading to help you understand the options available to you and what you should do when your mortgage renewal is denied.

Why was my renewal denied?

One of the most shocking aspects of being denied a mortgage renewal is that many borrowers don't even realize it’s a possibility. The truth is that, yes, your lender can deny your renewal and you will be forced to take action to keep your mortgage intact.

The important thing to know is that banks take on risk by lending to you and though they make money on interest, they can't collect repayment or interest from someone who is unable to pay them back at all. For this reason, banks must carefully vet their borrowers and continue to do so on a regular basis, explaining the need for mortgage terms.

Breaking a mortgage up into multiple terms over a single amortization period allows both lenders and borrowers to react to changing conditions. Change is to be expected and it's a good thing not to be locked into any agreement for a full 25 years or more.

The issue for borrowers is that with your mortgage renewal, the bank wants to reconfirm that you are a creditworthy borrower. That means they are going to want to recheck your financial situation. If things have changed enough between when you first took your mortgage and now, your lender may not see you as a safe borrower anymore.

There are many things that can lead a borrower to deny a mortgage renewal and they will be similar to the factors you had to reach to qualify in the first place. For example, if your income has decreased substantially or you have taken on a large amount of debt, your debt ratios may be over acceptable limits. Another factor may be your credit score. If you have allowed your score to fall too far, you may be below the point that a lender is willing to approve you for a mortgage.

How to make sure your mortgage renewal is approved

With the aforementioned factors in mind that can lead to a lender denying your mortgage renewal, it might occur to you that there are things you can do before it comes time to renew that can help you in making sure you don't get denied. If you observe these tips, you should be able to avoid any issues with your mortgage renewal.

Obviously, whenever possible, you need to make sure you are in good financial shape. There are a number of things you can do to help make yourself look good in the eyes of lenders.

One major consideration is your income. The banks will expect you to be able to pay your monthly mortgage payments so they need to know you have a reasonable income. Keeping a steady job or even improving your income is a great way to make sure your mortgage renewal proceeds without a hitch. As well as your income, you should consider your debts. Any debts you take on are going to tighten the debt ratios that banks use to qualify you for a mortgage. If you plan on taking on significant debt, even one that you think you can afford, be sure to check beforehand if it will affect your mortgage renewal down the line.

Finally, your credit score is going to be very important when trying to get your mortgage renewed. Your credit score will be an important indicator to the bank of how well you are able to pay back debts. If your credit score has seen a drastic decrease since your last mortgage contract, this is going to make your bank nervous about lending to you. Whenever possible, you should try to keep your credit score up or take action to help increase a damaged credit score. You should also be careful to avoid any missed mortgage payments, especially if you are at risk of being denied. A good relationship with your lender will be very important when it comes to negotiating a new mortgage contract.

You may also be able to see the problem coming ahead of time and try to stop it before it becomes dire. This may mean speaking to your lender about modifying your mortgage. For example, you may be able to switch from fixed to variable interest rates or vice versa to make your mortgage more affordable. Generally, your lender will always be more willing to work with you before a problem has come up rather than after.

You may even be able to refinance your mortgage mid-term to take advantage of better rates that may be available. You might need to pay a fee to do so, but a lower monthly payment and a better interest rate can save you money in the long run and make your mortgage easier to service. You should also consider what lender you want to go with when you are renewing. Though you have the option to switch for a better rate, you may find that your new lender has to do a lot more due diligence to approve you, increasing your chances of rejection. Generally, if you are in good standing with your current lender and have made your mortgage payments on time, they will be the easiest to get renewed under.

What are your options after a denial?

After your mortgage has been denied not all hope is lost, in fact, there are a lot of options you still have to help maintain your mortgage.

Consider switching lenders

First of all, if you tried to renew with a new lender and were denied, you should consider trying to renew under your current lender. As mentioned previously, they may be more lenient on their approval which can help if you just need that extra push to get approved.

The opposite is possible if you were denied by your current lender as well. It may be worth considering switching lenders, but unless they have significantly different or lower qualifying criteria, you may be denied there as well. If both your current and new lender are not willing to renew your mortgage, you will need to start looking at other options.

Other options beyond traditional lenders

Your next best option after you have been denied by the major 'A' lenders is to look to alternative 'B' lenders. These types of financial institutions have a wide range of offerings and qualifying criteria so there may be something here for you. These lenders often work with borrowers who are otherwise unable to borrow from major lenders due to financial issues or low credit scores, so are, in general, more accommodating and less strict. 

The downside is that you may pay a price for these concessions, and often, alternative lenders will have less favourable mortgage options including higher mortgage rates which will leave you with an increased mortgage payment. This will not always be the case, but the worse your financial situation is, the less appealing your options will be. This can be an issue if you have been denied for financial reasons as taking a more expensive mortgage may only serve to exacerbate your money problems.

Private mortgage lenders

If B lenders aren't willing to lend to you, you could look for a private lender. Because these lenders are private, they do not have to follow the same regulations as other lenders and can reach deals in any way they like. Again, these may come with higher rates. Mortgages from these lenders will vary a lot so it’s hard to say exactly if they are right for you, but it’s worth considering if other options have fallen through.

Selling your home

Unfortunately, there are only so many options available when it comes to mortgage lending. Fortunately, there is one worst-case scenario option that is always available and that is to sell your home. This is not an appealing option understandably, but it’s to your benefit to recognize when it’s time to cut your losses. 

Defaulting on your mortgage is generally bad for your credit score and can affect future borrowing options. At the very least, selling allows you to take control of the situation for yourself. Hopefully, if your home has generated some equity, you will be able to sell and pay off what you owe and potentially even have some money left over. This can help to tide you over while you get yourself resettled somewhere, but you may still need to get another loan to help cover closing costs and moving fees if your financial situation is very bad.

Work with a mortgage broker

If you have had your mortgage renewal denied or think it will be denied, you are going to need to find another option and you may not have a lot of time to do it yourself or understand where to look in the first place. Whether you decide to switch to a new lender or go the route of alternative or private lenders, you should highly consider working with a mortgage broker. 

They can help you find all of the options available to you and can help you compare to find the best rates. In many cases, you will not need to pay them for their services. Mortgage brokers are trained professionals who work exclusively with mortgages and they will be your number one point of reference when navigating a denied mortgage renewal.

Conclusion

It can be a scary experience when you are denied a mortgage renewal, especially if you didn't realize it was coming. Luckily, there are still options for homeowners after this has happened and there is help to be found in the form of a mortgage broker. Overall, being proactive about your financial situation as much as possible to avoid rejection is your best option. Beyond that, you should make sure you understand your options after a denial as you may need to act quickly to make sure you can continue your mortgage.

If you have found yourself in this situation, let this article serve as a general overview of what the process may be like, but don’t make it your final opinion. We would highly recommend speaking to a mortgage broker or financial advisor about your options if you have been denied a mortgage renewal.



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