Blended Mortgage: How It Saves You Money

Navigating the world of mortgages can be complicated, especially when interest rates fluctuate. As a homeowner with a fixed-rate mortgage, you may be eager to take advantage of declines in mortgage rates but don’t want to pay expensive prepayment penalties. This is where blended mortgages come in, offering Canadian homeowners a way to renew their mortgage and get a lower rate.

How Does a Blended Mortgage Work in Canada?

A blended mortgage combines your existing mortgage rate with a new, lower mortgage rate from the same lender. It blends the two rates together to get you a lower interest rate without breaking your current mortgage contract and paying expensive prepayment penalties.

A blended mortgage is similar to an early mortgage renewal. With a blended mortgage, your lender recalculates your mortgage payments using a blended rate that falls between your current rate and the new lower rate available. This allows you to take advantage of declining interest rates while avoiding refinancing fees.

For example, if you have a 5% mortgage rate with 2 years remaining on your term and the new rates are 4%, your lender may offer you a blended rate of 4.5% by averaging your existing 5% rate with the new 4% rate.

This blended rate is then used to calculate your new mortgage payment and term length. There are two options for setting the new term:

Blend and Extend

The most common type of blended mortgage is the blend and extend. With this option, your lender blends the rates and extends your remaining mortgage term.

Using the example above, if you had 2 years left on your 5-year term, your lender would blend your 5% rate with the 4% rate and extend your term back to 5 years. This locks in the savings over a longer period.

Blend to Term

With a blend-to-term loan, your lender combines your old and new rates but does not extend your term. You simply get the blended rate for whatever term length remains.

In our example, you’d get the 4.5% blended rate but only for the remaining 2 years of your term, not a full 5-year extension. This provides short-term savings but keeps your renewal timeline the same.

How to Calculate Blended Mortgage Rate?

You can get an estimate of what your blended rate might be by using a simple calculation:

1. Multiply your current rate by the months remaining on your term.
2. Multiply the new rate by the number of months of the extension term.
3. Add the two totals together.
4. Divide the total by the number of months of the new extended term.

For example, we have:

• Current Rate: 5%
• Months Remaining on Term: 24
• New Rate: 4%
• Months on Extension Term: 36

How to calculate:

• 5% x 24 months = 120
• 4% x 36 months = 144
• 120 + 144 = 264
• 264 / 60 months (new 5-year term) = 4.4% blended rate

So, using the blend and extended structure, your blended rate would be around 4.4% in this example.

Pros and Cons of Blended Mortgages

A blended mortgage has key advantages and disadvantages to consider.

Pros of Blended Mortgages

• Lower interest rate – You can take advantage of declines in mortgage rates to get a rate lower than your existing mortgage. This saves interest costs over the term of your mortgage.
• Avoid prepayment penalties – With a blended mortgage, you avoid breaking your fixed-rate mortgage contract, so you don’t have to pay expensive prepayment penalties. These can be 3 months of interest or more.
• Access home equity – When you refinance your mortgage, you can often withdraw some built-up home equity as a tax-free cash lump sum. This flexibility is a key benefit of blended mortgages.

Cons of Blended Mortgages

• May Not Be the Lowest Rate – While you get a lower rate, it likely won’t be as low as getting a fully discounted “new” mortgage rate. You are still factoring in your previous higher rate.
• Rates Could Go Lower – There’s always the risk that mortgage rates will drop even lower in the future. You lose the chance to get those lower rates later.
• Can’t Transfer to New Property – Blended mortgages cannot be ported to a new property. You’d have to break it and pay penalties if you need to move.

What are Alternatives to Blended Mortgages?

Here are 4 alternatives to consider beyond blended mortgages:

Break Your Existing Mortgage

If interest rates have dropped significantly below your existing mortgage, you may want to break your term, pay the penalty, and get a new lower-rate mortgage. This route offers the most potential interest savings but has hefty prepayment penalties.

With a fixed rate, penalties are the greater of three months’ interest or the interest rate differential (IRD), which accounts for rate differences. On a variable rate, it is simply three months’ interest.

Home Equity Line of Credit

If you mainly want to access equity from your home, a HELOC allows you to borrow up to 65-80% of your home value. It is a revolving credit facility where you only pay interest on what you use. A HELOC does not require refinancing your mortgage.

Open Mortgage

With an open mortgage, you can repay at any time without penalty. This provides maximum flexibility if rates decline in the future. However, open mortgage rates are generally higher than closed mortgages.

When Does a Blended Mortgage Make Sense?

Here are six scenarios where a blended mortgage could be advantageous:

• You want to access equity from your home for renovations or other large expenses.
• Current rates have dropped by 1% or more compared to your existing mortgage rate.
• You have at least 15-20% equity available to withdraw from your home.
• You do not plan to move or sell your home in the next 5 years.
• You want payment and rate stability by extending your mortgage term.
• The savings outweigh the costs of breaking your mortgage and getting a new, fully discounted rate.

How to Apply for a Blended Mortgage?

Here is an overview of the 5-step process to get a blended mortgage in Canada:

Step 1: Contact your lender

Discuss blended mortgage options with your mortgage lender or broker. Provide details on your existing mortgage.

Step 2: Calculate savings

Estimate your new blended rate using the formula above and determine potential cost savings vs. penalties of breaking your mortgage.

Step 3: Complete the application

Complete a mortgage refinance application and standard documentation. This includes proof of income and home value assessment.

Step 4: Get approval

Your lender will review and provide mortgage approval based on debt levels, credit score, loan-to-value ratio, and other eligibility criteria.

Step 5: Close and set up new payments

Sign your blended mortgage agreement. The lender will establish your new blended payments based on the extended amortization schedule.

Be sure to discuss fees and closing costs with your lender to ensure a clear understanding. This process may require an appraisal and legal costs, and the lender may also charge a blended mortgage administration fee.

Which lenders offer blended mortgages in Canada?

The table below outlines which of the major banks and lenders in Canada offer blended mortgage options:

Lender	Blend and Extend	Blend to Term
TD Bank	Yes	Yes
Scotiabank	Yes	Yes
RBC	Yes	Yes
CIBC	Yes	Yes
BMO	Yes	Yes
National Bank	Yes	Yes
Laurentian Bank	No	Yes
Home Trust	Yes	No
First National	No	Yes

Almost all major lenders offer some form of blended mortgage, but eligibility and specifics can vary. Check with your current lender to see what options they offer.

Key Takeaways: Should You Get a Blended Mortgage?

A blended mortgage allows you to refresh your existing mortgage with a lower rate while avoiding expensive prepayment penalties. It also provides flexibility to withdraw equity for other uses.

For the right borrower, a blended mortgage can provide substantial savings on interest costs over the next 5 years without the fees of breaking your term. But be sure to compare all options, including paying penalties on a full mortgage refinance.

Consult a mortgage professional to determine if a blended mortgage is your smartest option.

Frequently Asked Questions About Blended Mortgages

Article Sources

• Breaking your mortgage contract – canada.ca