How Does Mortgage Renewal Work?

Is your mortgage coming up for renewal? It may be something you’d rather avoid, but think of it as an opportunity to review your finances, make sure all your ducks are in a row, and consider your options. You may even save yourself some money over the course of your amortization if you’re informed and prepared.

In this guide, we will answer common questions like “How does a mortgage renewal work,” “What happens if your mortgage renewal is denied,” and “Do banks check credit for a mortgage renewal in Canada.” By the time you finish reading, you’ll feel ready to go into your mortgage renewal with confidence.

What Are the Steps in a Mortgage Renewal?

Your lender will let you know three to six months before your term expires and propose an additional term with a current interest rate.

If the offer is acceptable to you, you’ll sign your renewal agreement, and the mortgage continues under the new terms.

Generally, the process is straightforward and continues in the same way until your mortgage is paid off.

What Are the Alternatives to Renewing Your Mortgage with the Same Terms? 

If you want to change the terms of your mortgage, you can:

• Negotiate a different rate from your current lender.
• Opt for a shorter or longer term for the mortgage renewal. Most people lock in a longer term if the rate is low, but they might choose a shorter one if they think mortgage rates will go down.
• Shop around for a different lender. You won’t need to pay a penalty to switch if you do it at the time of your renewal, but you will be applying for a new mortgage, so expect to go through a credit check, fill out forms, and provide documentation.

It’s always a smart idea to use a mortgage renewal calculator to see what your payments would be under different scenarios.

How Are Mortgage Renewal Rates Determined?

Lenders use a few sources of data to determine the mortgage renewal rate for each borrower.

Market conditions

Market conditions serve as the basis for mortgage rates. When the economy and the housing market are strong, interest rates also tend to be higher.

Competition

If a lender is trying to retain customers or attract new ones, they may offer lower rates. This is one reason why it can make sense to shop around.

Your Financial History

If you have a good credit score, low debt, and a stable income source, you could get better rates from lenders trying to get your business. You may even qualify for lower mortgage renewal rates with your current lender; be prepared to negotiate for them, because they may not be offered to you automatically.

Your Loan-to-Value Ratio

If you still have a high balance on your mortgage relative to the market value of your home, you could be considered higher risk, and your mortgage renewal rates will reflect that. Of course, this is balanced by the rest of your financial profile.

Can a Bank Deny Mortgage Renewal in Canada?

Yes, a bank can deny a mortgage renewal. Most homeowners won’t face this situation, but it can happen. Here are some common reasons for denying a mortgage renewal:

• Missed mortgage payments.
• A low credit score.
• A serious decline in your household income.
• Increased debt levels.

It’s rare for a bank to deny a mortgage renewal in Canada, so don’t panic. Even if your finances have suffered a blow, your credit may not be as severely affected as you think.

What to Do If Your Mortgage Renewal Is Denied

In the unlikely event that your lender does deny your renewal, these are the steps you can take:

• Talk to your lender about why your renewal was turned down. There could be solutions you can work out with them, and it could even be a mistake; it’s not unusual for credit reports to have errors in them.
• Improve your financial profile by reducing your debt or boosting your income, even if it’s a temporary boost. Although it’s challenging to think of it this way, try to use this bump in the road as motivation to ask for a raise or get a new, higher-paying job.
• Refinance rather than renewing. Consider changing to a longer amortization to lower your monthly payments or changing the loan amount by borrowing some of the principal from a relative.
• Look for other lenders. A mortgage broker can help you find an alternative, although you should be aware that they may charge higher rates.

How to Prepare for Your Mortgage Renewal

Start well before your renewal date by reviewing your financial profile and noting any major changes.

Check your credit score to make sure it’s high enough that you won’t have a problem with your mortgage renewal (over 740 is good). If it’s lower, get a credit report from both Equifax and TransUnion and dispute any errors you see on them.

Think about any changes you want to make. Here are some typical adjustments you might consider:

• Switching from a variable rate mortgage to a fixed rate one or vice versa.
• Changing your payment schedule from monthly to biweekly or weekly.
• Making the term of this renewal longer or shorter
• Negotiating a lower interest rate
• Making a lump sum payment toward the principal at or before the renewal if your lender allows it.

If you don’t make any changes, your lender will renew your mortgage automatically at the terms in your renewal notification. If you want to make changes, do so before the renewal is processed, as penalties or administrative costs could be attached to making changes later on.