Renewing a mortgage can be stressful for some homeowners, but refusal to renew from your lender can make that stress even more intense.
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As a wave of homeowners who bought at rock-bottom interest rates prepare to renew their loans at higher rates this year, a small number of them will be denied renewal by their lender.
Leah Zlatkin, a licensed mortgage broker and expert at LowestRates.ca, says lenders often make contact several months before the renewal date.
“If you have had difficulty making your payments on time […] and they notice that you have regularly missed payments on your credit cards or that you have negative balances in your checking or savings accounts, they may question this renewal and call you to inform you that they will not renew your mortgage, says Mme Zlatkin.
Non-renewals are primarily driven by financial difficulties, but another reason could be that the lender views the homeowner as presenting what it calls a serious risk. For example, she explains that a bank may have reservations about renewing a client whose name appears in the media as part of a criminal trial for fraud.
In recent years, the Bank of Canada has raised its key rate to curb inflationary pressures following the COVID-19 pandemic. Although borrowing costs have fallen from their recent peak, the current policy rate stands at 2.25%, about two percentage points higher than at the start of the pandemic.
Earlier this month, the Canada Mortgage and Housing Corporation said in a report that it was seeing signs of financial hardship among homeowners in Toronto and Vancouver, with mortgage defaults expected to rise steadily, albeit from a low level.
The report also mentions that first-time buyers who purchased during the pandemic, when interest rates were at historic lows, are also showing signs of increased vulnerability. He specifies that these owners have taken on larger debts in relation to their income and have limited equity in their homes purchased at high prices.
More than 1.5 million households have already renewed their mortgages at higher interest rates, with an additional million expected to do so in the coming year, according to the agency.
Guarantors, income, debts
If a homeowner is faced with non-renewal, experts say they have several options.
According to Mme Zlatkin said if a person can add others to their mortgage as a guarantor or co-signer, such as a spouse, parent or sibling, it could help them get a renewal.
Borrowers could also look to increase their income by renting out part of their home or taking on additional work, she says.
Ron Butler, principal broker at Butler Mortgage, emphasizes that lenders “don’t randomly decline renewal.”
“The federal government has made it clear to them that if people are up to date with their payments, they have to give them some sort of renewal facility,” he explains.
In addition to increasing income, Mr. Butler says reducing debt can also help.
“For example, if you have two car loans, you can sell one of the cars or pay off one of the loans,” he gives as an example.
However, some homeowners may have to resort to selling their home or obtaining a private mortgage, which can result in much higher borrowing costs.
For comparison, a bank’s mortgage rates might be around 4%, an alternative lender’s around 5 or 6%, and a private lender’s around 9% or more.
He says that in such situations, despite the higher costs, it would give the homeowner some time to improve their financial situation, with the goal of being able to return to a traditional lender.
Mme Zlatkin notes that there is currently “no indication” that lenders will reduce renewals this year.
“As long as people are making their payments and they haven’t had any major problems that the bank can identify, and there’s nothing on the credit bureau that could be considered negative, most people won’t have problems renewing,” she concludes.
