A mortgage is a type of loan used specifically to purchase real estate. When you obtain a mortgage, you often obtain it for a specific period of time, called a term. A mortgage is typically taken out from a financial institution, such as a bank or credit union, and the terms associated with your mortgage are often only valid for the length of your mortgage term. Upon reaching the end of your term, which in Canada is most often 5 years, you will need to renew your mortgage and terms with the same lender, or refinance your mortgage by switching to another lender.
Unfortunately, your mortgage renewal can be denied. In 2023, the top reason for denial has been insufficient income. Most homeowners renewing their mortgages this year began their latest term in 2018, when the BoC overnight rate was between 1.25-1.75%, and must now face the impact of a 5.00% rate. As a result, many lenders have tightened their income and debt requirements, leading to an uptick in renewal rejections.
The good news is, with enough preparation, and the help of a good broker, you can greatly increase your odds of success. In this guide, we will cover the most common reasons for denial, the best courses of action, and the impact of your credit.
If you have been denied by your bank for your mortgage renewal, you may be wondering why. Unfortunately, there is no clear formula for whether or not a bank can deny your mortgage renewal, but certain factors can greatly reduce your odds of approval.
Firstly, missed payments may signal a significant breach of your financial commitment. Lenders consider missed payments as indicators of financial irresponsibility, and may consider you unreliable in meeting your financial obligations, creating doubts about your ability to handle future mortgage payments. Changes in your employment, such as job loss or sudden reduction in income, can also negatively affect your odds of mortgage renewal approval. Lenders prefer borrowers with stable and consistent income sources, as it ensures a steady stream of funds to cover future mortgage obligations.
In order to solidify your application, and ensure you are checking all the appropriate boxes, you may want to check out our guide on getting approved for a mortgage in 2023. Before jumping into the renewal process, being aware of your financial situation and taking steps to fill gaps in your application (paying down existing debt, etc.) can help set you up for success.
If you have been denied a mortgage renewal, it's essential to carefully compare your current lender's offer with offers from other lenders before deciding on a course of action. Just because you no longer qualify for renewal with your current lender does not mean that you cannot refinance your mortgage with another lender.
Working with a mortgage broker is a great way to optimize this process, and find out which lender is best for you. Your Clover Mortgage broker can help you examine the terms of your existing mortgage, including the interest rate, term length, monthly payment, and any specific conditions or penalties, and compare it against the offerings of over 60+ different lenders within the Clover Mortgage network. They can also reach out to your current lender to inquire about their renewal offer on your behalf, and potentially negotiate for more favourable terms and rates.
It is also a good idea to contact multiple lenders and mortgage brokers to request quotes for a mortgage renewal. Make sure to provide them with accurate information about your financial situation, including your credit score, income, and any changes since you initially obtained the mortgage. A broker can help expedite this process, but you can also go about it yourself. Compare the interest rate offered by your current lender with the rates offered by other lenders. Keep in mind that interest rates can vary based on the type of mortgage (fixed or variable), term length, and your creditworthiness. Once you've compared offers and negotiated terms, make sure to get all offers and conditions in writing. This will help you make an informed decision and protect your interests.
If all else fails, a final option for a denied mortgage renewal is selling your house and downsizing to a more affordable home with a lower mortgage. While selling your house is not always the best option or most desired option, in many cases it might help alleviate financial stress for you and your family.
While you cannot fully predict the outcome of a mortgage renewal application, you can certainly come prepared. To ensure a smooth and beneficial renewal process, start by reviewing your current mortgage agreement. Understand the terms, interest rate, and any specific conditions that may be unique to your loan.
Next, assess your financial situation. Check your credit score and take steps to improve it if necessary, as a good credit score can help you secure better terms. Evaluate your income and debt levels to ensure you can comfortably handle the next term mortgage payments, especially if your interest rates have changes. It's advisable to start working with a broker and shopping around from various lenders well before your current term expires. Compare interest rates, term lengths, and any additional fees. Be prepared to negotiate with your current lender or explore options with new ones to secure the most favourable terms, and make your financial goals known to your broker ahead of time—especially if they are negotiating on your behalf
While there are a number of factors that can impact your mortgage renewal process, including income, debt, and payment history, your credit score plays an especially pertinent role in your approval. A drastic decrease in your credit score can significantly hurt your chances of qualifying for a mortgage renewal from your existing lender.
Credit checks are typically performed before a mortgage renewal is approved; however, there are certain exceptions. If you are a borrower who consistently makes your payments on time, and has never given your lender any reason to doubt your credibility, they may send a renewal letter to you without even conducting a credit check. If you have missed a few payments in your last term, your lender is more likely to conduct a credit check, but this doesn’t mean you won’t ultimately be approved for renewal.
Your credit score is always available to your creditors, and they might check it at any moment. In our experience as a mortgage brokerage, some clients are concerned because their credit score has declined, or they have amassed too much debt since signing their first mortgage agreement. Our advice is to constantly keep an eye on your credit score and credit history to determine where you stand at all times. If your credit report is in disarray, and you have delayed examining your credit report until the renewal period, you may face a higher interest rate upon renewal or be denied renewal altogether.
A mortgage renewal and a refinancing are two distinct financial transactions related to your mortgage, and they serve different purposes:
A mortgage renewal occurs at the end of your current mortgage term. When your term expires, you have the option to renew your existing mortgage with the same lender or shop around for new terms with different lenders. It typically involves extending your current mortgage agreement with your existing lender or negotiating new terms, such as the interest rate, term length, and type of mortgage (fixed or adjustable). A mortgage renewal is not a new loan application. Instead, it allows you to continue your existing mortgage based on the agreed-upon terms, subject to any negotiated changes.
Mortgage refinancing, on the other hand, is when you replace your current mortgage with a new one from a different lender or the same lender. The primary goal of refinancing is to secure better terms, which might include a lower interest rate, changing from an variable-rate mortgage to a fixed-rate mortgage, accessing equity through a cash-out refinance, or changing the length of your mortgage term. Refinancing often requires a new loan application, a credit check, and a more comprehensive financial assessment, as it's essentially replacing your existing mortgage with a new one.
Unfortunately, you can be denied for a mortgage refinance, just as with a renewal or an initial mortgage application. Lenders assess your creditworthiness, financial situation, and the equity in your property when you apply for a refinancing. Common reasons for refinance denial include a low credit score, insufficient income to cover the new mortgage terms, high levels of existing debt, and property appraisal values that do not support the requested refinancing amount. Nearly a quarter of refinance applications were rejected in 2022, up from ~14% the year prior. Insufficient income continues to be the largest driver of this trend, with rising rates continuing to put pressure on Canadian and US consumers.
Regardless of whether you are looking to renew or refinance your mortgage, Clover Mortgage can help. Contact us today to get started with a free consultation, and begin planning for your financial future.