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Mortgage de-selection at renewal

Mortgage deselection: Can your lender choose not to renew your mortgage? 

In its third-quarter earnings call, Scotiabank said it was undertaking a strategy of “customer deselection at renewal” as part of its efforts to slow its mortgage growth and be more selective of its client base.

“I think this is a good time to drive that standard higher here because it’s a softer, slower housing market,” said Dan Rees, head of Canadian Banking. “We are also being more efficient with regards to our use of capital and using customer deselection at renewal as part of that conversation.”

With an estimated three million Canadians facing a mortgage renewal over the next 15 years, that comment has raised a very important question for many borrowers: does my lender have to renew my mortgage?

Is your mortgage renewal guaranteed?

For a little bit more context, we reached out to some mortgage professionals.

“If the mortgage is up to date, if the payments are up to date, then some renewal will be offered to the homeowner. That’s the general policy of these organizations,” says Ron Butler of Butler Mortgage.

While this is a typical practice among federally regulated banks, Butler points out that provincially regulated credit unions also tend to follow the same guidance.

From Butler’s perspective, borrowers might be refused renewal if there were major violations of the contract such as rebuilding the home without permission, or if the homeowner ended up in prison. 

Frances Hinojosa, CEO of Tribe Financial, adds that there are sometimes other risk factors that lenders may consider.

“I think there’s this misconception that when we come up for renewal, the banks are going to renew regardless. And that’s not necessarily the case,” Hinojosa said.

Lenders may review multiple factors, such as the current loan-to-value (LTV) ratio or the prevailing economic environment, when they’re assessing the risk of that client, she added.

A potential misinterpretation

While “mortgage deselection” evokes images of a lender simply refusing to renew a client’s mortgage, the process is actually more nuanced.

In no uncertain terms, Butler said the chance of Scotiabank—or any other major lender—choosing not to renew clients is a very low probability.

“I have seen nothing at all that would indicate that Scotia is sending people notices that they will not renew their mortgage,” he told CMT. 

Matthew Imhoff, founder of Meticulous Mortgages, says the process more often involved a renewal offer that’s simply not appealing to the client.

“When I look at the banks, the deselecting is more [about] offering a rate that the bank is willing to accept to keep the client,” he said.

It’s also important to note that Scotiabank has been very open about its strategy to scale down its mortgage book in order to focus more on growing its deposits, whereas the other major lenders are typically still looking for both origination growth and customer retention.

A riskier rate environment

But with hundreds of billions of dollars in mortgages coming up for renewal at higher interest rates, and banks setting aside large amounts of funds in preparation for a rise in delinquencies, Hinojosa says all lenders are carefully assessing risk.

They’re also having to balance regulatory requirements that now require them to keep additional capital on hand in the event of potential future losses. On Friday, for example, the Office of the Superintendent of Financial Institutions (OSFI) maintained its Domestic Stability Buffer—a kind of “rainy day fund”—at 3.5% of risk-weighted assets. This is in addition to minimum capital requirements for Canada’s Big 6 banks to keep on hand at least 11.5% of risk-weighted assets.

“We’re seeing more complexity around [the interest rates lenders offer] especially now when we’re in a lending environment where there’s higher capital requirements,” Hinojosa said. “[Lenders] are looking more at risk levels, they’re forecasting out for if there are going to be any potential defaults.”

Additionally, Butler views the use of the term deselection to express Scotiabank’s desire to “maintain the kind of margins they felt they needed to make on mortgages,” he indicates. 

In an email to CMT, Scotiabank clarified Rees’ comment from Scotia’s earnings call.

“Our mortgage portfolio remains strong and when a mortgage comes up for renewal, we continue to be committed to providing our mortgage customers with appropriate renewal options based on their individual needs and financial goals.”