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When you start looking at different options for taking advantage of the new mortgage rates, blend and extend mortgages are going to become enticing options. Let’s take a look at how these work and how you can save money with them.
How Blend and Extend Mortgages Work
Blend and extend mortgages, also known as one of the types of blended mortgages, combines your existing interest rate along with the current mortgage interest rates. This allows you to take advantage of a lower mortgage rate without having to invoke any penalties on your current term. However, there may still be some fees involved.
With these types of mortgages, it’s important to note that your mortgage term will also be extended. How long is up to your lender, but it usually resets the term. So if you have a 5-year term but are only 2 years in, then the 5 years would start over again, making your total mortgage term 7 years.
Rates on Blended Mortgages
The rate you receive on a blended mortgage is going to sit somewhere between your current rate and the new lower rate. This rate is going to be a little different for everyone and is based not only on the rates but also on how much time is left on your current mortgage term. Let’s take a look.
How to Calculate These Rates
In order to calculate your new blended rate, the simplest way to explain it is by using an example. Let’s say that your current rate is 8%, and now the lower rate is at 5%. If you have 3 years left on your 5-year term, then a blend and extended mortgage can get you a much better rate.
- The first thing you want to do is multiply your current rate by the months left in your terms. For this example, this would be 8x36. The number you will get from this is 288.
- Next, you're going to take the number of months remaining in your term and subtract it from the number of months in your new 5-year term. This would be 60-3,6, which gives you 24.
- With this number 24, you’re going to multiply it by your next interest rate, which is 5%. In this case, 5x24 is 120.
- Now that we have both 288 and 120, you’re going to add them together to get 408. You’re then going to divide this number by the number of months in your new term. So, for this example, we’re dividing 408/60. This is going to give us our new blended interest rate, which will be 6.8%.
Since 6.80% is lower than 8%, you’re likely to not only save you money on your regular mortgage payments but on your total mortgage payments overall. If you don’t want to do the math yourself, though, you can always use a blended mortgage calculator.
Different Blend and Extend Options Per Bank
When it comes to blended mortgages, many different banks will offer you blend and extend options. In this case, especially the top 5 banks. Let’s look at how some of these financial institutions blend and extend options work and how to go about getting them.
Royal Bank
Just like many other large banks, RBC can offer a blend and extend mortgages. For this particular bank, they can blend your current mortgage rate along with additional funds you borrow at current market rates. You will have to speak to a mortgage specialist to get your blended mortgage options.
TD Canada Trust
In the case of blending and extending with TD Canada trust, this commonly only happens when purchasing a new home. Instead of breaking your existing mortgage you can port the total mortgage over to the new home as long as the mortgage amount is the same or more than your old mortgage amount. Any additional funds have your new rate as close to the old term as they can.
Scotiabank
With Scotiabank, there are two different ways to port over or blend your mortgage. In order to use this, though, you need to have a closed, fixed-rate mortgage. You can transfer your existing fixed mortgage to a new home, combine the existing mortgage with a new loan and extend your term. The fixed rate on the new loan is a blended rate from your existing rate and new rates. You do have to apply for a new separate mortgage product to qualify, though.
Penalties for Blend and Extend Mortgages
While a blend and extend mortgage is considered a form of breaking your mortgage term, it doesn’t come with prepayment penalty fees. This is because you aren’t paying off your mortgage at all. Any new amounts you take out are just added to your current mortgage. That said, a typical refinance or paying off your home early would come with a prepayment penalty. Keep in mind that this is only for closed mortgages.
Benefits of Extending Your Mortgage Term
When it comes to extending your mortgage term at a lower rate, you can not only avoid prepayment penalties but also keep your monthly payments low. It’s important to keep in mind that we’re only referring to the mortgage term and not the amortization period of the mortgage. Extending the amortization period can reduce your payments but increase the overall cost of your mortgage. You may also have to pay penalties.
Blend to Term Mortgages
Blend-to-term mortgages are similar to blend-and-extend mortgages. However, the term of the mortgage isn’t extended. In this case, the mortgage rates are blended. Some might choose this type of mortgage if they believe the mortgage rates will drop even further and don’t want to be locked in for an extended period of time with this current rate. Depending on the length of your current term, this could end up being more affordable even though you still have to pay interest.
Penalties For Breaking Your Mortgage Term
When you’re looking into early mortgage refinancing or breaking your mortgage term, it’s important to understand that there will be fees involved. These fees are referred to as prepayment penalties. You’ll also likely have to pay:
- Administrative fees
- Appraisal fees
- Reinvestment fees
- Mortgage discharge fees
While all of these fees are usually specific to the lender you have your mortgage with, prepayment penalties are usually three months interest (of interest-only payments) or a different set interest differential in your mortgage contract and can end up adding to thousands of dollars depending on your mortgage amount. While it’s not ideal, sometimes there’s just no avoiding paying charged prepayment fees.
Should You Get A Blended Mortgage?
Whether or not you should get a blended mortgage and blended mortgage rate really just depends on your situation and why you are looking to get one. It’s a good idea for those looking to get a lower rate or access equity without getting a home equity line of credit (revolving line of credit), but you need to pay attention to the terms.
It’s also important to look at the trajectory of the interest rates and see if they’re rising or falling. If they’re continually falling, it might not be a great idea to get a new interest rate and a longer term if you don’t have to.
Disadvantages of a Blended Mortgage
While blended mortgages are a good option to lower your mortgage payments, they also have their disadvantages. For starters, once you get a blended mortgage, it can’t be transferred to a new property if you decide to move. You will have to pay that mortgage off before you get a new one, so if you’re thinking of this then it won’t make more financial sense.
Depending on the conditions of your mortgage, it could actually be cheaper just to pay the repayment penalties instead of blending and extending. However, it can also be a tough call because interest rates and inflation aren’t set in stone. It’s hard to know definitively what interest rates are going to do, along with the housing market and shifting market conditions and could end up costing you more money.
Final Thoughts
In Canada, there are different ways you can adjust your mortgage without paying it off and getting a new mortgage loan. You can do this with a blend to extend mortgage. However, different lenders have different rules when it comes to these types of mortgages. Some only allow you to do this when you purchase a new home. In this case, though, you still end up saving money on prepayment penalties and other fees.
When interest rates drop, and you still have a high interest rate on your mortgage, it could be a good option to talk to your mortgage lender or mortgage broker regarding a lower interest rate. They may say it’s cheaper to refinance your mortgage, but in other cases, a blend to extend mortgage could be the best option.
