Schmeichel has kept four clean sheets in six games.
And City boss Sven Goran Eriksson insisted he fully deserves the new deal - despite some people's reservations about his positioning.
Eriksson revealed: "We're very close to agreeing a new contract with Kasper. I know in our last home game against Aston Villa he came out a couple of times when it was not best too.
"But you must expect a 20-year-old goalkeeper to make some mistakes.
"But you cannot take away the fact that in the Premier League four clean sheets out of six is an excellent run."