What Happens if Your Mortgage Renewal is Denied? A Guide for Homeowners in Canada

According to Forbes Advisor Canada, about 3% of mortgage renewals are denied in the country. The million-dollar question is: what happens if your mortgage renewal is denied?

Keep reading to see why mortgage renewals are denied in the first place, how you can avoid this situation, and what are your options in case of denial.

Why Would Your Mortgage Renewal Be Denied?

Banks can deny mortgage renewals due to credit score issues, missed mortgage payments and/or arrears, changes in income or employment status, high debt-to-income ratio, decreased property value, interest rate changes, market conditions, and lender policies.

But here's the good part: starting November 21, 2024, renewing a mortgage with a different lender doesn’t need a stress test, as long as the loan amount and payment period stay the same and the original mortgage is from a federal institution. This simplifies switching lenders significantly.

For more info, review the Financial Consumer Agency of Canada’s guide on “renewing your mortgage.”

What Are the Immediate Consequences of a Denied Mortgage Renewal?

So, what happens if your mortgage renewal is denied in Canada? If you’re among that 3%, the immediate outcome is not being able to continue making payments under the existing terms. To avoid default on the mortgage, you’ll need to secure alternative financing quickly, either through refinancing with another lender or securing a bridge loan.

If no new agreement is reached by the mortgage's maturity date, the lender can start the foreclosure process to recover the unpaid balance. Finally, in the worst-case scenario, you’ll lose the house and any equity you’ve built up.

What Are Your Options if Your Mortgage Renewal Is Denied?

Now that you know what happens if you don't renew your mortgage, let’s review the options if the renewal request is denied:

• Negotiating with your lender: Even if the initial application is denied, you can negotiate a different mortgage product or terms (such as an increased down payment) with your current lender. This is the best option for many homeowners, as there’s always a higher chance of denial with new lenders.
• Refinancing with a new lender: Shop around and compare rates and terms with different banks and mortgage lenders.
• Working with a mortgage broker: Brokers have access to more lenders and products than you might have on your own and can save you a lot of time and effort in finding the best deal.
• Improving your credit score: Address any financial issues and work on improving your credit score to reach, or better, exceed the minimum credit score for a mortgage.
• Applying with B-lenders: If traditional A-lenders (banks) deny renewal, consider trust companies or credit unions with more flexible lending criteria.
• Exploring private lending options: Private lenders have less restrictive requirements than traditional lenders but charge higher rates.
• Selling your house (last resort): if none of these options were available, you may want to consider selling the house and downsizing it to a more affordable property.

Steps to Avoid Mortgage Renewal Denial

Start by checking your credit report for errors and correcting them in advance. Maintain a good credit score by paying bills on time, keeping credit utilization under 30%, and reducing high-interest debts. Avoid new credit applications before renewal too.

Communicate proactively with your lender months before renewal (ideally 4-6 months before the current term expires). Discuss financial changes since your initial mortgage so the lender can assess your current risk profile and explore options like refinancing or adjusting payment plans.

Renewing Your Mortgage When Unemployed in Canada

Mortgage renewal while unemployed often doesn't require proof of employment; consistent mortgage payments are key.

To improve your chance of approval, consider a co-signer for a home loan or show income from other sources (retirement plans, rentals, etc.) If traditional lenders deny renewal, private or B-lenders or lenders are your alternatives.

Frequently Asked Questions

Can a Bank Deny Mortgage Renewal in Canada?

This is rare, but a bank can deny mortgage renewal in Canada. Follow the steps discussed earlier to guarantee a smooth renewal process.

What happens to my mortgage if I don't renew it?

Mortgage renewal is necessary at the end of every term. So, what happens if I don't renew my mortgage in Canada? This allows your lender to renew the mortgage into an open term with possibly higher rates.

What do banks look at for mortgage renewal?

Banks evaluate your credit score, payment history, debt-to-income ratio, employment status, and changes in property value to determine your eligibility and the terms of the new mortgage.

Do banks check credit for mortgage renewal?

Yes, your credit could be checked during the process. Your current lender might conduct a soft credit check too.

Will debt affect my mortgage renewal?

Probably not. Because when it comes to mortgage renewal, on-time mortgage payments generally outweigh other debts.

The Bottom Line

The looming question for many homeowners is: what happens if your mortgage renewal is denied? While this situation is stressful, it's often beatable. With proactive planning, open communication, and exploring alternatives, you’ll find a solution that works best for you.