What is a Blend and Extend Mortgage?
A blended mortgage is a frequently overlooked tool that can help save you money on interest charges, extend your term with a favourable interest rate, and unlock your home equity.
The most common type is the blend-and-extend mortgage.
With a blend-and-extend mortgage, you combine your existing mortgage rate with a new one provided by your lender.
Additionally, your current term will be extended.
Acquiring a blend-and-extend mortgage doesn’t constitute breaking your mortgage; as a result, you won’t incur a prepayment penalty or onerous fees.
Your lender might charge you a small administrative fee, but you can try to negotiate to have it waived.
The appeal behind this type of mortgage is that you can reset your term and lock in a new rate that’s lower than your current one, saving a substantial amount of money in interest charges while avoiding a potentially hefty prepayment fee.
Example Blend and Extend Scenario
Here’s an example that illustrates how a blend-and-extend mortgage works:
Suppose the economy has been losing momentum during the last couple of years.
As a result, average mortgage interest rates are declining.
You decide to renew your mortgage term early by exercising the blend-and-extend option to take advantage of the lower rates.
For this example, assume you have a five-year fixed-rate mortgage with a balance of $300,000.
Your contracted interest rate is 5.75%, and you have two years or 24 months remaining in your term.
Currently, your lender offers an interest rate of 4.75% for a five-year fixed-rate mortgage.
By choosing a blend-and-extend mortgage, you’d receive a new interest rate that’s somewhere in between 4.75% and 5.75%.
Your present term will also be extended by three years, effectively providing you with a new five-year term where you’d pay interest at the blended rate.
To estimate your blended rate:
- Multiply the number of months remaining in your term by your current rate 24 x 5.75% = 1.38
- Perform the same calculation as above, but use the additional months added to your term and the lender’s prevailing rate offer
36 x 4.75% = 1.71 - Add the two sums together and divide by the total number of months in your new term to get a blended rate of 5.15%
((1.38 + 1.71) / 60) = 0.0515 OR 5.15%
Of course, this is a simplified calculation; your lender might employ a more complex model that incorporates various factors to assign your blended rate, however this should give you a ballpark idea.
Fact
Even though acquiring a blend-and-extend mortgage doesn’t trigger a prepayment penalty, your lender can still compensate for this loss by tacking on a premium to your blended rate, which means you’ll pay off your penalty slowly over time.
Advantages of a Blend and Extend Mortgage
- No prepayment penalty. Since you’re not cancelling your mortgage contract, you won’t be subject to a prepayment penalty, which, in some instances, can be financially crippling.
- Lower interest charges.Suppose current mortgage rates are dropping across the country. In that case, merging your old rate with a new lower rate will provide you with a more affordable mortgage, netting you immense savings in interest costs.
- Great for porting. Porting allows you to transfer your existing mortgage to a new property, which is valuable if you’re buying a new property and selling your old one simultaneously. A blend and extend arrangement can streamline the process, allowing you to avoid having to reapply for a new mortgage and paying any associated penalties.
Disadvantages of a Blend and Extend Mortgage
- Tough to predict rates. If you secure a blended rate and extend your term right before rates begin dropping sharply, you’ll miss out on even better bargains in the future.
- Mortgage transfer is disallowed. You generally can’t port a blended mortgage to a new property. This type of transfer is only permitted if you’re in the process of selling your old property and acquiring a new one, not after the fact.
- It might be inferior to other options. Refinancing your mortgage or taking out a home equity line of credit (HELOC) might be a more financially wise option depending on your goals, budget, and other factors.
Types of Blended Mortgages
Here’s an overview of the different types of blended mortgages available:
| Blend and Extend | Blend and Increase | Blend to Term | |
|---|---|---|---|
| What Is It | Your contracted mortgage rate is merged with your lender’s current rate, and your term is extended | Your contracted mortgage rate is merged with your lender’s current rate, and you receive additional mortgage financing | Your contracted mortgage rate is merged with your lender’s current rate, but no additional time is added to your term |
| Who Is It For | Geared toward homeowners looking to save on interest costs, avoid a prepayment penalty, and who value a predictable mortgage payment schedule | Geared toward homeowners looking to save on interest costs and acquire additional funds to purchase a new home, finance a major purchase or consolidate debt | Geared toward homeowners looking to save on interest costs and who prefer to shop for new rates once their term expires |
| Key Benefit | Take advantage of lower interest rates without refinancing | Access your home equity without getting a HELOC or refinancing | Take advantage of lower interest rates in the near term |
Don’t Forget
A blend-to-term mortgage typically comes with a higher blended rate than a blend-and-extend mortgage since your lender loses out on interest income by issuing the former (unless you also choose to increase your mortgage amount).
