Are you considering filing a consumer proposal? If so, you may be wondering, how will a Consumer Proposal affect my mortgage renewal? It’s a valid concern, as the last thing you want is for your renewal to fail, potentially putting your home at risk.
Luckily, there’s good news: a consumer proposal typically won’t affect your mortgage renewal, provided you’ve been making your mortgage payments on time. It’s possible that your lender may approve your renewal at a higher interest rate than they would if you didn’t file a proposal. But even this scenario is rare. As long as your mortgage is in good standing with your existing lender, you should have no problems with your renewal.
The impact of a consumer proposal on your mortgage renewal
Failed mortgage renewals, in general, are exceptionally rare. Only about 3% of mortgages are denied in Canada. So, the odds of a successful renewal are already in your favour. Filing a consumer proposal doesn’t change them much, if at all.
The first reason your lender will likely approve your renewal is that a consumer proposal deals exclusively with unsecured debts. A mortgage is a secured debt, so the terms and conditions of your proposal don’t affect your mortgage lender. They face no extra risk, so your renewal should be straightforward and automatic, provided you make your payments on time.
The second reason your renewal is likely to succeed is that your mortgage lender has a vested interest in you continuing your payments. After all, they earn a tidy profit from the interest. If they deny your renewal and you default on your mortgage, they’ll have to foreclose your home. That outcome may result in a loss for them, so it’s one they prefer to avoid.
In addition, mortgage lenders understand that a consumer proposal lowers your risk as a borrower since it shrinks your debt obligations. A consumer proposal can reduce up to 80% of your unsecured debts, leaving you more money in your bank account. And more money means you’re less likely to fall behind on your mortgage payments.
How a consumer proposal impacts your mortgage interest rate
For the most part, a consumer proposal won’t impact your mortgage rate upon renewal. Your lender will typically offer you the market rate and a customer loyalty discount. You’ll have the opportunity to negotiate a lower rate, too.
However, depending on your lender’s policy, you may only be eligible for rates slightly higher than those offered to typical borrowers. The reason is that filing a consumer proposal results in an R7 rating on your credit report, the second lowest rating you can get in Canada. As a result, your credit score will drop, which signals that you’re at a higher risk of defaulting on your loan.
Your mortgage lender may review your credit report as your renewal approaches, especially if they suspect you’re facing financial trouble. If they do, they’ll discover the consumer proposal on your report, which could influence the interest rate they offer you.
However, this isn’t something to worry deeply about. Lenders also assess income stability, debt ratios, and other factors when deciding what rates to offer borrowers. Your credit score is only one criterion they consider during the mortgage renewal process. If you check all the other boxes, they’ll be willing to overlook a poor credit score.
Remember: A mortgage renewal is not the same as a mortgage application. Since you’ve already qualified for your mortgage, your lender cannot force you to requalify again simply because your credit score has declined. All you need to do is sign the renewal contract and continue making timely payments. It doesn’t matter whether you’re working through a consumer proposal or not.
What happens if you switch lenders or refinance your mortgage?
Things get more complicated if you switch lenders or refinance your mortgage.
When you move your mortgage to a new lender, you must requalify for it under that lender’s criteria. In other words, you’re not simply renewing but entering into a brand-new agreement.
Unfortunately, your financing options and ability to negotiate rates will be limited when shopping for a new lender since a consumer proposal impairs your credit rating. As a result, you may only be able to transfer your mortgage to a B lender, which charges higher rates than traditional lenders.
The same concept applies if you refinance your mortgage with your existing lender. Refinancing breaks your current contract, so you must qualify for a new mortgage. But with a lower credit score, there’s a greater chance you’ll fail to meet the requirements. Or, you may only get approved at a higher interest rate.
Regardless of the loan type, you must rebuild your credit to access the best interest rates and terms. The good news is that you can start even while working through your proposal using secured credit cards and other financial tools.
How to ensure your mortgage renewal is successful while in a consumer proposal
There are no guarantees that your mortgage renewal will get approved after you enroll in a consumer proposal. But as explained in this article, it’s unlikely that your lender will deny your renewal since it’s not in their financial interest to do so.
Remember: your mortgage lender doesn’t care about your consumer proposal – they only care about whether you can make your mortgage payments. So, the best thing you can do to ensure your renewal goes through smoothly is to pay on time every time.
If you’re not in the best financial shape, make adjustments where possible. Increase your income by taking on a side hustle. Decrease your expenses by taking on less debt and cutting back on discretionary spending. Do what you can to demonstrate to your lender that you’re a low-risk borrower.
Do you still have concerns about your upcoming mortgage renewal? If so, contact your mortgage broker or lender several months before the renewal date to discuss your options. And if you’re considering filing a consumer proposal, don’t hesitate to contact us for a free consultation. We can review your financial situation, explain all your debt relief options, and answer any questions you have about filing a consumer proposal in Ontario.
