This piece was originally published on August 4, 2020, and was updated on October 3, 2023.
When you take out a mortgage, you’ll sign a contract with your lender that outlines its specific features, such as the interest rate you’ll pay, whether it’s open or closed, and any additional perks such as the ability to make accelerated payments, or porting from one property to another. This contract is called the mortgage term, and it lasts for a set number of years – typically five, though two- and three-year mortgage terms are also common in Canada.
When your mortgage term reaches its maturity date, you’ll need to renew your outstanding mortgage balance for another term. In fact, most borrowers will do this five to six times before their mortgage is fully paid off.
At mortgage renewal time, you’ll have the choice to either stick with your existing lender, or to refinance your mortgage and apply for a new rate with a different lender. Your current lender is keen to retain your business, however, and will make the process as seamless as possible by sending you an offer to renew your mortgage before your term expires.
The offer will include a new mortgage rate, typically for the same length of time as your current term, as well as a slip that you can sign and send back. While this might be convenient, it doesn’t mean you’ll get approved. It can also cost you more over the long-term, which is why we suggest switching providers at renewal time.
But, what happens if your mortgage renewal isn't approved? First of all, don’t panic – there are some steps you can take. Here’s what to do if your mortgage renewal is denied.
Why your mortgage renewal was denied
Let’s start by going over the two ways your mortgage renewal application can be denied, depending on whom you’re working with.
1. Renewal denied by your current lender
One good reason to stick with your current lender is that it doesn’t need to re-qualify you (for example, determine your debt service ratios and require you to pass the mortgage stress test). Typically, as long as you’ve made all your mortgage payments throughout your term, there’s no reason your current lender would deny your mortgage renewal application.
However, your lender will still review your current financial situation and see if you’ve racked up more debt than it believes you can afford to repay, taken a credit score hit, or if your employment situation has changed for the worse. If anything about your finances concerns your current lender, it can choose not to renew you.
Renewing at a time when interest rates are much higher – such as they are today, following 10 historic rate hikes from the Bank of Canada over the last 18 months – can also increase the risk of having your mortgage renewal denied.
One way to prepare ahead of time for this scenario is to run your current mortgage through our mortgage payment calculator to see if you might struggle to make payments at current interest rates.
2. Renewal denied by a new lender
If your current lender denies your mortgage renewal, or if you just want to shop around for a better offer, you can try to renew your mortgage with a new lender (you can contact a mortgage broker or mortgage agent to help you find a new lender). Unfortunately, your chances of being denied by a new lender are actually higher than if you stay with your current lender. This is because you need to submit a brand new mortgage application with your renewal.
The new lender knows nothing about your financial situation, other than the outstanding balance of your mortgage, which it will only know after looking at the renewal slip provided by your current lender. As such, it will need to verify your income and ensure you meet its specific credit requirements, as well as pass a mortgage stress test, before it can approve your application. You’ll be at a high risk of being denied by a new lender if you’ve missed mortgage payments or have significantly damaged your credit score. In that case, it might be best to stay with your current lender, since it doesn’t need to re-qualify you.
If you have time before your renewal date, use our mortgage affordability calculator to see how much you could borrow if you were looking for a new mortgage today.
Bear in mind that, as a new applicant, you will need to pass a mortgage stress test of either 5.25% or your contract rate + 2% – whichever is higher. (In today's market, both the best fixed and variable rates on the market are higher than 5.25%, making the first criteria null and void.) In fact, the current average stress test is hovering above 8%, based on an average five-year fixed mortgage rate of 6.22%.
What to do if your mortgage renewal is denied
Okay, so your mortgage renewal was denied – what’s the next step?
- If you were rejected by a new lender: Let’s say you tried to shop around for a better offer, but were denied by a new lender. The first thing you need to do is talk to your current lender, to see if it will renew your mortgage.
- If you were rejected by your current lender: If both a potential new lender and your current lender deny your mortgage renewal, or if your current lender rejects your signed renewal slip outright, you’ll need to look at other options.
Mortgage renewal denial options:
If your mortgage renewal has been denied from your current lender, here are your options, from best to worst:
1. Find a B lender
If your original mortgage was with an A lender, like a bank or credit union, then you can talk to B lenders about your situation. B lenders are typically trust companies or bad credit institutional lenders. They are more likely to lend to people with lower credit scores and/or more debt than A lenders are.
2. Talk to a private lender
If your credit score is extremely low, you can even be denied by a B lender. If this happens, you can talk to a private lender. This is far from ideal, as private lenders have some of the higher mortgage rates on the market, which is likely to cost you a lot more in interest over time.
3. Sell your home
If you can’t get a mortgage that suits your finances, you may need to consider selling your home. This is the worst possible option, because it will require you to sell and move on short notice. If you’re close to your mortgage renewal date, you may not have time to finish the sale before your term expires. In this situation, you might need to take out a short-term or open mortgage to tide you over, probably from a B lender or private lender.
The bottom line
While it’s rare for a mortgage renewal process to reach the point where you’ll need to sell your home, it can happen if your financial situation has drastically changed for the worse. This is why it’s so important to make your monthly mortgage payments and maintain a good credit score. By doing so, you should never have a problem getting at least your current lender to renew your mortgage for another term.
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- How inflation affects your mortgage
- How to get a mortgage with bad credit
- The trigger rate: Everything you need to know
- How to stress test your mortgage