# Blend and Extend Mortgage: A Simple Guide

## 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.

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 3.75%, and you have two years or 24 months remaining in your term.

Currently, your lender offers an interest rate of 2.25% 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 2.25% and 3.75%.

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.

• Multiply the number of months remaining in your term by your current rate 24 x 3.75% = 0.9
• Perform the same calculation as above, but use the additional months added to your term and the lender’s prevailing rate offer
36 x 2.25% = 0.81

• Add the two sums together and divide by the total number of months in your new term to get a blended rate of 2.85%
((0.9 + 0.81) / 60) = 0.0285 OR 2.85%

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
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).