Can you renew your mortgage with a bad credit score?

With 57% of Canadians expecting higher monthly payments on their mortgage renewals this year, borrowers are already facing an uphill battle. And if you're also dealing with a bad credit score, it can feel like you're stuck between a rock and a hard place. While a low score can mean higher rates and fewer options, there are still ways to navigate the challenge. In this guide, we'll show you how to turn your credit blues into a mortgage win. 

What is considered a bad credit score for mortgage renewal?

A "bad" credit score is typically considered to be anything below 600, though different lenders may have slightly different thresholds. Credit scores are usually measured on a scale from 300 to 900, with higher numbers indicating a better credit history. Scores in the "fair" range (560-659) may still allow you to renew your mortgage, but anything below 600 can raise red flags for lenders.

Since your credit score is determined by factors like your payment history and outstanding debt, a low score often signals to lenders that you’ve struggled with payments, have high levels of debt, or haven’t demonstrated enough positive credit activity to prove your reliability.

How a bad credit score affects mortgage renewal

When renewing a mortgage with a bad credit score, lenders may see you as a higher-risk borrower. As a result, you could face several risks:

• Higher interest rates: To offset the perceived risk, lenders may offer you a higher interest rate, which can lead to larger monthly payments.
• Limited loan options: You may have fewer choices when it comes to the type of mortgage or lender, especially if you’ve been with your current lender for a while.
• Shorter terms: Some lenders may offer shorter renewal terms, such as a 1-2 year fixed rate, to keep their options open in case your financial situation doesn’t improve.
• Denial of renewal: In extreme cases, if the lender deems your financial situation too risky, they may deny your renewal, leaving you to seek out alternative solutions.

How can I get a mortgage with a bad credit history?

Here are some strategies to improve your chances of securing a mortgage despite your credit history.

Talk to your current lender

When you’re dealing with a bad credit history, it’s often best to start by speaking with your current lender. They already have a record of your mortgage payments, which means they understand your financial habits better than any new lender would. If you’ve made your payments on time and have a good relationship with them, your current lender might be willing to offer you a renewal even with a lower credit score.

Some lenders have programs for customers who are in financial difficulty, like a co-signer or government-backed programs, allowing for a more flexible renewal process.

Shop around for other lenders

If your current lender isn’t offering favourable terms, it’s worth shopping around to see what other lenders can provide. Switching lenders might take effort and time, but it can be the best way to secure a favourable mortgage deal if you're dealing with a bad credit score. When you shop around, keep an eye out for:

• Better interest rates: Some lenders, especially those offering specialized products for high-risk borrowers, may offer lower rates than your current lender, even with a bad credit score.
• Flexible terms: New lenders might be more willing to offer longer repayment periods or a more manageable interest rate structure.
• Incentives: Many lenders offer incentives for switching, like cash-back offers, reduced application fees, or discounts on mortgage insurance. These perks can help ease the transition and offset the cost of switching.

Consider a co-signer

A co-signer is someone — usually a close family member or friend — with stronger credit who agrees to share the responsibility of your mortgage. This person essentially guarantees the loan, stepping in to make payments if you're unable to. Having a co-signer on board can make a major difference, as lenders see this as a way to reduce their risk, making them more likely to offer you lower interest rates and better terms.

However, it’s crucial to remember that a co-signer is not a free pass. You are still responsible for making your mortgage payments on time, and failing to do so can damage both your financial future and the trust you've built with your co-signer.

Work with a mortgage broker

Mortgage brokers have access to a wide range of lenders, including those who specialize in working with clients who have poor credit. Acting as an intermediary between you and various lenders, they can help you secure a more favourable deal than you might be able to on your own. With their expertise, brokers can often negotiate better rates and terms on your behalf.

Instead of shopping around and applying to multiple lenders yourself, a broker does the legwork for you, saving you both time and effort.

Tips for improving your credit score before renewal

The smartest move you can make before your mortgage renewal is to give your credit score a boost. Here are some simple ways to raise your score and avoid bad credit mortgages:

• Pay bills on time: Set up automatic payments or reminders to ensure you never miss a due date. The longer you maintain a history of on-time payments, the better your score will reflect your financial reliability.

• Reduce credit card balances: High credit card balances relative to your credit limit can hurt your credit score. Aim to reduce your balances to below 30% of your total available credit. Paying down credit card debt also lowers your debt-to-income ratio — a factor lenders look at when considering mortgage renewals.

• Diversify credit types: Having a mix of credit types, such as credit cards, installment loans, or a line of credit, can benefit your score. Lenders like to see that you can manage different types of credit responsibly. However, avoid opening new lines of credit right before applying for mortgage renewal, as this could temporarily lower your score.
• Dispute any inaccuracies: Review your credit report regularly for any errors or outdated information. If you find discrepancies, such as incorrect late payments or balances, dispute them with the credit bureaus and improve your score quickly.

Alternative options to renew mortgage with bad credit history

Refinancing options

When you refinance, you replace your current mortgage with a new one, which may help you secure a lower monthly payment or change the terms of your loan. However, refinancing with bad credit can be challenging, and lenders may charge higher interest rates or impose stricter conditions. Here’s what you need to know about refinancing with bad credit:

• Equity in your home: If you’ve built up equity in your home, refinancing may be easier to manage. Lenders may be more willing to approve a refinance if your home’s value is significantly higher than your outstanding mortgage balance. 
• Debt consolidation: Refinancing gives you the option to consolidate other high-interest debts (like credit cards or personal loans) into your mortgage. By doing this, you may reduce the overall interest rate you’re paying on those debts. However, consolidating debt means you’re increasing your home loan amount, which can make your mortgage payments higher. 
• Cash-out refinance: If your home has appreciated in value, you could consider a cash-out refinance, which allows you to access the equity in your home for extra funds. However, this option increases your debt load, which could be risky for your credit score.

Private lenders

If you're struggling with bad credit and can’t secure a renewal through traditional banks, private lenders could be an alternative. These lenders are generally more flexible with credit scores and may approve your mortgage renewal based on factors like your property’s value and marketability, rather than just your credit history.

However, private mortgage loans come with trade-offs. They often charge higher interest rates to offset the increased risk, which could result in higher monthly payments. Additionally, private lenders generally offer shorter terms of one to three years, acting as a bridge toward a longer-term A-lender mortgage.

Downsizing your property

If securing a mortgage renewal proves challenging due to bad credit, downsizing your property could be a practical solution. Selling your current home and purchasing a smaller or more affordable property can help you lower your mortgage payments, reduce debt, and potentially improve your financial situation. If your home has appreciated in value, you may even have extra funds to pay off other debts or build up savings.

Save for a larger down payment

If you're considering refinancing or selling your home and purchasing a new one, saving for a larger down payment can help you secure a better loan. A bigger down payment reduces the lender's risk, which can make them more willing to offer you more favourable terms, even if your credit score isn’t ideal. By increasing your down payment, you can also lower the loan-to-value ratio, which may help you secure lower interest rates and reduce monthly payments.

The bottom line

Renewing your mortgage with a bad credit score doesn’t have to feel like a dead end. While it may be tougher to secure the best terms, there are still plenty of options to help you through the process. Whether it’s negotiating with your current lender, exploring private lenders, or considering refinancing or even downsizing, taking action now can open doors for you.

Also read:

• Credit Score Myth: Does Checking Your Credit Score Lower It?
• More borrowers than ever are turning to private mortgages
• 10 Common credit score mistakes to avoid
• How to get a mortgage with bad credit