The mortgage process in Canada can be difficult for home buyers to negotiate, as the loan you take out is only designed to take you part of the way toward completing the purchase of the home. In most cases, mortgage payments are set up on an amortization schedule of between 15 and 30 years. However, you can’t sign a mortgage loan in Canada with a term of longer than 10 years. At the end of the term, you are expected to renew the loan for another term and then keep making payments until you have paid off the house.
If you make your payments each month and maintain your employment and income status, and if your credit score stays relatively stable, then renewal shouldn’t be a problem. The bank has to send you a renewal statement at least 21 days before your term comes to an end. This statement will have information such as the balance upon renewal, the interest rate for the renewal loan, the term of the renewal loan and any associated fees. If the lender has decided not to renew your mortgage because of your poor payment history or for other reasons, it also has to notify you 21 days before the end of the term.
The best way to go about this is to be proactive, though. Between three and six months before the end of the term, get in touch with your lender and talk about how the renewal process will go. Talk about potential interest rates and consider whether you want to change from a closed to an open loan if you haven’t been making early payments but want to start. If you’ve had a rocky payment history, it’s time to find out if the bank plans to renew you or not. You don’t want to be surprised with a rejection letter 21 days before your loan comes to an end.
If you decide not to renew with your existing bank, then you’ll need this time to get the ball rolling with another lender. If you wait too long, the best case is that your mortgage gets automatically renewed — but possibly according to terms and at an interest rate that you find unattractive. Stay ahead of the process, and talk to your bank, and then shop the loan around. It is a hassle to have to renew your mortgage several times over the course of your amortization, so you might as well turn the process into a money saver for yourself and get the best deal at each renewal.
Can you be denied a mortgage renewal?
If you know well ahead of time that your bank is not going to renew your mortgage, then you’ll have time to put together different financing so that you can stay in your house at renewal. You definitely don’t want to have the loan called — and have nowhere to go for financing.
But what can you do if banks aren’t approving your renewal? You’re not alone. People lose jobs and burn through their savings, and then they can’t make their mortgage payments each month. Others suffer from a long-term illness that keeps them from being able to work, while still others go through divorce and other family events that radically change their financial situations.
The best approach is to be as proactive as possible when these things happen. Talk to your bank if you think you’re going to be late with a payment and explain the situation. Communication is key — remember, the banks would rather have your money than turn you down, so be as open as possible so that you maintain your relationship. If things get to the point where the banks won’t renew you, though, Amansad Financial can help you find alternative sources of funding to help keep you in your house.
Here’s what you can do if your mortgage renewal is denied
We have access to a network of private lenders — individuals and companies that invest in higher-risk loans. They charge a higher interest rate than what you would get from the banks, and the terms are shorter — usually no more than a year or two. However, that gives you time to get your credit back in order so that when the renewal time comes you can qualify for a bank again. Some private lenders allow you to make interest-only payments during the term so that you can replenish other areas of your budget while you’re getting back on your feet. Then, at the next renewal, you can qualify with a bank and start making full (or even extra) payments once again.
Don’t let mortgage renewal stress you out. If you’re worried about non-renewal and have already talked to your bank, give one of our alternative financing specialists a call today, and we’ll discuss your situation and make some specific suggestions to help give you peace of mind and start you back on the road to your future.
Understanding Mortgage Renewal and the Timing Factor
There are many factors to consider when timing mortgage renewal. When you are due for a mortgage renewal, your financial picture may have changed significantly since you signed the previous loan, so you may want to keep your options more flexible with an open mortgage this time, as you may have a lot more money to pour into extra principal payments. The interest rates may have changed since your last mortgage — and they may be likely to change between now and the next renewal.
There’s also the question of whether you should stick with your original lender or jump ship to a new bank. If the deal is good enough, then you should take a look at what else is out there. You probably heard about an annual principal prepayment privilege with your original loan, which means that you can pay off as much as 20 percent of your original note every year without having to pay a penalty. This takes place in additional lump sum payments separate from your monthly mortgage draft — and all of the money goes toward principal. This privilege tends to vary between 10 and 20 percent — but if you switch banks, oftentimes the new lender won’t use the original amount of the note as your baseline, while your original lender will.
Here’s an example. Let’s say that you opened a six-year $500,000 note in 2009 allowing an annual principal prepayment privilege of 15 percent. This means that you could knock off $70,000 in additional principal each year. If you have $200,000 in principal remaining at the mortgage renewal, if you stay with the same bank you could still knock that principal out annually. If you change to a bank that offers 20 percent but only credits you for that $200,000 as your base principal, you can now only knock out $40,000 per year without any penalty. So if you plan on continuing to make those big principal payments, you might consider staying with your original bank even if you are paying a slightly higher interest rate, because you will end up paying on interest on so much less money.
One mortgage to avoid is the “collateral charge mortgage.” This ends up costing you legal fees if you want to change lenders at mortgage renewal time. This is generally a normal option that you have and should not cost you any fees. Some banks, such as ING Direct and TD Canada Trust, only offer collateral charge mortgages — and they don’t always let you know that this is involved. While collateral charge mortgages sometimes allow you more flexibility in terms of credit lines and refinancing, but you’ll want to consider carefully whether this is an option that you want to have in front of you.
One way that your bank may try to keep you in the fold is by offering you an “early mortgage renewal.” In a way, this is a gift, because it keeps you from having to worry about what will happen to your mortgage after the current term expires. However, you want to pay careful attention because renewing early simply means that the bank gets another term’s worth of payments from you, even though your original bank might not be giving you the best deal out there. So a lot of banks will send their mortgage clients letters out offering early renewal as many as 120 days ahead of the renewal — or even longer. A lot of these clients go ahead and send the paperwork back in — without even bothering to shop the loan around for a better rate. According to Rob Carrick with the Toronto Globe and Mail, about 60 percent of borrowers renew their loans well ahead of the maturity date.
In some cases, renewing early is a wise choice. The bank is still offering the best deal out there, and you’ve built a solid credit relationship with this lender. However, the reason why Canadians even have to go through the mortgage renewal process at all is to protect the banks from having to provide loans over a 20-, 25- or 30-year period for mortgages stuck at one interest rate. The renewal process means that banks get the chance to lend money for shorter periods of time at those rates. So in a situation like the present day, when interest rates are at historically low levels, the banks aren’t stuck in the same situation as those south of the border, where banks are issuing 15- and 30-year fixed rate mortgages at these rock bottom rates. In Canada, the longest term that a mortgage can have is 10 years, and those rates are a lot higher than the three- or five-year rates. The effect is that banks get to change up their rates every four or five years. You as the mortgage client could end up at the mercy of the financial markets if rates take off between now and your next renewal.
So when you do come up for mortgage renewal, it’s crucial to take a look at the math of renewing with your bank or shopping the note around. Switching banks can often lead to discharge or assignment feels (usually around $300, depending on the province) and you’ll have to take out a title insurance policy (usually around $150 or $250 but occasionally much higher). Think about the fact that rates could rise between the time you get the renewal letter and the actual renewal deadline, and look at how interest rates have moved over the past few months. Review the financial news with special attention toward the movement of interest rates. If you have a variable rate discount from prime on your loan, you’re less likely to be surprised by last minute changes than you are if you’re sitting on a fixed rate.
Look at some of the other banks offering loans in your area, and compare the rates (and the fees) with your existing bank. Consider the impact on early prepayment privilege as well. You will also end up devoting about four hours of your life to closing on that new loan if you do switch banks, so factor that in as well. The worst thing you can do, though, is sign that renewal letter without looking at your options. You can be sure that your bank tracked its options before giving you a renewal offer that gives them as much profit as they think they can draw from you in the current market.