Unexpected Truths: The Possibility of Mortgage Renewal Denial for Canadian Homeowners

Did you know that according to a recent survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP), a whopping 18% of mortgage renewals in Canada are denied every year? Not only that, around 25% of homeowners experienced difficulties with their mortgage renewal process in one way or the other. This means that contrary to popular belief mortgage renewal is not just a formality. Honestly, I don't think anything can be more horrifying for a mortgage holder after diligently paying their mortgage instalments for years.

That is why today The Canadian Home will go over how the renewal process functions, what could lead to a decline and most importantly how to ensure that you don't draw the short end of the stick.

First Know the Process

The best way to make sure that your renewal application goes through is to know and understand how the overall process works. Although there are several steps involved it can all be boiled down to these 4.

Preparation: It's recommended to start preparing for the mortgage renewal process up to 120 days before your mortgage matures. This gives you time to research interest rates, and mortgage product options, and assess your financial situation. Most lenders allow early renewal without a prepayment penalty, but this only applies if you're renewing with the same lender.

Renewal Notice: About one month before your mortgage term ends, your lender will send a mortgage renewal statement. This statement includes details of the new mortgage offer, such as the new interest rate, term, payment frequency, and any fees you might have to pay.

Negotiation and Decision: At this point, you can decide to accept the lender's terms, negotiate for a better rate or term, or switch to a different lender. If you choose to switch lenders, you may face additional fees, legal costs, and a mortgage stress test if you have an uninsured mortgage.

Renewal with Current Lender vs. New Lender: Renewing with your current lender is generally easier and may not involve additional fees. However, if you switch to a new lender, you'll need to go through a re-qualification process, which includes a new mortgage stress test for uninsured mortgages, and you may incur additional fees.

Renewal Rejected: Top 4 Reasons

Now that you have a much better understanding of how the renewal process works we can discuss the reasons that can lead to renewal decline. In the same survey by CAAMP, they also identified the most common reasons that can lead to potential decline. Here are the 4 most common reasons.

Significant Negative Impact on Credit Score: The average length of a mortgage term in Canada is 5 years and that is a lot of time for things especially from your credit side to change. Things like utilizing more than 35% of available credit, new credit requests for large sums and missed payments on any of your ongoing credits can have a huge impact on your credit score. When your current or new lender does a stress test this can be a huge red flag for them.

Missing Your Mortgage Payments: Despite maintaining a favourable credit score, the occurrence of missed or delayed mortgage payments can trigger concerns among lenders. Such instances might lead them to view you as a heightened risk, potentially resulting in the rejection of your renewal application, particularly if there's a pattern of multiple missed payments.

Job or Income Change: Lenders place a high priority on stable and consistent income sources when considering renewal applications. This emphasis reflects their desire to ensure that borrowers have reliable means to meet their monthly mortgage obligations. Thus, any fluctuations or uncertainties in employment or income can raise concerns for lenders during the renewal process.

A High DTI Ratio: A high debt-to-income ratio can be a critical factor in determining the approval of a mortgage renewal application. Lenders meticulously evaluate this ratio as it provides insight into an individual's ability to manage their debts effectively. If the ratio indicates that a significant portion of the borrower's income is already committed to debt payments, it may raise concerns about their capacity to take on additional financial obligations.

Read More: Boost Your Mortgage Approval Chances: Discover the Types of Assets To Include in Your Application

The I-R-S Of Improving Your Chances

INITIATE

Securing a successful mortgage renewal in Canada requires proactive preparation. Start early by researching rates and options at least 3-4 months ahead. Strengthen your financial standing by improving your credit score and managing debt wisely. This proactive approach sets the stage for a smoother renewal process and enhances your chances of approval.

REVIEW

Understanding your renewal options is key to making informed decisions. Review your renewal statement meticulously to grasp the terms and interest rates. Conduct thorough research on market rates to compare offers from different lenders. Armed with this knowledge, you'll be better equipped to negotiate with your current lender for a better rate or consider refinancing with a new lender if necessary.

STREAMLINE

Gather all necessary documents beforehand, such as proof of income and property tax statements. Respond promptly to any requests from your lender to avoid unnecessary delays. Seeking professional help from a mortgage broker can also simplify the process, especially if you're unfamiliar with refinancing or comparing rates. By following these steps and seeking professional guidance, you can navigate the mortgage renewal process with confidence and increase your chances of success.

That's It, Folks!

While a mortgage renewal denial can be discouraging, it doesn't have to derail your homeownership dreams. By understanding the common reasons for denial and taking proactive steps like working with a mortgage broker, improving your credit, and exploring options, you can increase your chances of success. Remember, there are resources available to help you navigate financial challenges. With knowledge and the right approach, you can overcome obstacles and build a secure future for yourself and your family.