Declining mortgage rates often present homeowners with a dilemma: stick with their existing mortgage or chase better deals. A blend and extended mortgage offers a middle ground, allowing you to lower payments without breaking your mortgage contract or paying hefty prepayment penalties.
Curious how this works? Let’s unpack blend and extend mortgages, explore financing alternatives, and determine whether this strategy is right for you.
What is a blended mortgage?
Blended mortgages are a mortgage relief option available in Canada that allows you to combine your existing mortgage rate with a new rate without breaking your current mortgage contract.
Suppose you’re halfway through a 5-year fixed-rate mortgage at 6%, but rates have since dropped to 4%. A blended mortgage would average these rates, giving you a blended interest rate (e.g., 5%) that splits the difference.
How do blended mortgages work?
Blended mortgages allow you to combine the interest rate of your existing mortgage with the current mortgage interest rate offered by your lender, resulting in a new blended mortgage rate that falls between the two. This approach helps you avoid prepayment penalties typically associated with breaking your mortgage contract early while benefiting from lower interest rates.
How is a blended rate calculated?
Lenders use a weighted average based on the remaining mortgage term to determine the new blended rate, combining your existing interest rate with current rates. For example, you have 24 months left on a 5% existing interest rate mortgage and renew for 60 months at a 3% current rate, the blended rate factors in the remaining time:
\[\text{Blended Rate} = \frac{(R_{\text{current}} \times M_{\text{remaining}}) + (R_{\text{new}} \times (M_{\text{new}} – M_{\text{remaining}}))}{M_{\text{new}}}\]Where:
- Rcurrent = Original interest rate (e.g., 5%)
- Mremaining = Months left on current term (e.g., 24 months)
- Rnew = New interest rate (e.g., 3%)
- Mnew = Total months in the new term (e.g., 60 months)
The new blended rate will apply to your total mortgage amount, including your existing mortgage and any new funds borrowed.
What is the difference between blended rate and non-blended rate?
A non-blended rate ignores your existing rate and applies the current market rate to your entire mortgage balance. Blended rates, however, honour your original agreement while still offering savings.
Choosing a non-blended rate may require paying a penalty upfront since you are essentially breaking your mortgage, while a blended rate can help you avoid this immediate cost.
Types of blended mortgages in Canada
There are three types of blended mortgages in Canada, each catering to different financial needs and goals:
1. Blend and extend mortgages
This popular option combines your existing mortgage rate with a new, typically lower rate, and extends your mortgage term to a new full term. For example, if you have 3 years left on a 6% fixed-rate mortgage and current rates are 4%, blending these rates over a new 5-year term locks in some savings for a more extended period.
2. Blend to term mortgages
With a blend term, your existing mortgage rate is blended with a new rate, but the mortgage term remains unchanged. The new blended interest rate applies only to the remaining length of your current mortgage term. For instance, if your mortgage has 2 years left at a 6% rate and market rates are 4%, your blended rate might be around 5.5% for those remaining 2 years.
This option offers flexibility if you expect interest rates to drop further or prefer not to extend your commitment. However, some lenders may require you to access equity or charge administrative fees to offer this option, as they may lose money without a term extension.
3. Blend to increase mortgages
If you need to access your home equity, a blend to increase lets you borrow more money by tapping into your home’s value while blending your existing rate with a new one. Your total mortgage amount increases, but the blended mortgage rate may soften the cost of the additional borrowing.
This option can be combined with either blend and extend or blend to term, depending on whether you want to extend your mortgage term or keep it the same. It’s a valuable choice for funding renovations, consolidating debt, or other expenses without facing prepayment penalties.
Is a blended mortgage a good idea?
While the benefits of a blended mortgage are often evident, it’s important to also consider the potential drawbacks. Here are the pros and cons of blended mortgages:
Pros:
- No prepayment penalties: With a blended mortgage, you can avoid costly fees typically charged when you break your mortgage early, such as the interest rate differential or three months’ interest penalties.
- Lower interest rates: Benefit from reduced monthly payments by blending your existing mortgage rate with current lower rates.
- Flexibility: Access home equity or adjust your mortgage terms without refinancing or starting a new mortgage contract.
Cons:
- Longer commitment: Extending your mortgage term may increase the total interest paid over time.
- Potentially higher blended rate: If interest rates drop further after blending, you may miss out on even lower rates.
- Possible administrative fees: Some mortgage lenders may charge administrative fees for setting up blended mortgages.
Alternatives to a blend and extend mortgage
Home equity loans
Home equity loans provide another option for accessing additional funds without altering your existing mortgage terms. These loans are separate mortgage products that allow you to borrow a lump sum against your home’s value, which you can use for various purposes, including home renovation, emergency medical bills, or debt consolidation.
Unlike blended mortgages, home equity loans do not affect your current mortgage contract, making them a practical alternative if you want extra cash without blending or refinancing.
Mortgage refinancing
Refinancing involves laying off your current mortgage and replacing it with a new mortgage contract, often to secure lower interest rates or access equity. However, refinancing usually incurs prepayment penalties, such as the interest rate differential or three months’ interest, along with legal fees and appraisal costs. It also requires breaking your current mortgage contract, which blended mortgages help you avoid.
Blend, extend, or tap equity? How Alpine Credits can help
Whether you’re looking to reduce monthly payments with a blend and extend mortgage or need immediate access to your home’s equity, the right solution depends on your financial goals. While blended mortgages can offer a balanced approach to rate savings without penalties, Alpine Credits’ home equity loans provide unmatched flexibility for homeowners who want to:
- Avoid prepayment penalties (when renewed at term maturity or when applied separately)
- Access up to 75% of your home’s equity quickly
- Fund renovations, consolidate debt, or cover emergencies without refinancing
Contact us today for a free, no-obligation quote and discover how you can leverage your home equity strategically – no blended rate calculations or long-term commitments required.
Frequently asked questions
What does a blended interest rate mean?
A blended interest rate is a weighted average of your existing mortgage interest rate and a new mortgage interest rate. It is designed to lower payments without refinancing or paying prepayment penalties.
Is there a penalty for blend and extend?
No—blending avoids prepayment penalties, though some lenders may charge administrative fees. Always ask your mortgage lender if they offer blended mortgages and under what conditions.
Is it worth extending a mortgage term?
Extending your mortgage term locks in savings if interest rates are rising or stable, providing payment stability. If rates are expected to drop, blending to term keeps your options open without extending commitment.
Can a blended mortgage be used to access my home equity?
Yes! The blend to increase option lets you borrow more against your home’s equity while blending rates, often without paying penalties associated with refinancing. You can also use home equity loans as a separate option to tap into equity without altering your primary mortgage.