Blended Mortgage in Canada: How It Save 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.

This comprehensive guide will cover everything you need to know about blended mortgages – from calculating your new blended rate to weighing the pros and cons.

What is a Blended Mortgage and How does it work?

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 more extended 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

There are 3 main advantages 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 refresh 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

Besides the benefits, blended mortgages also have 3 disadvantages:

• 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 higher old rate.
• Rates Could Go Lower – There’s always the risk 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 (HELOC)

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.

Cash Out Refinance

You can do a traditional refinance and withdraw equity at the same time. This lets you get the lowest new rate while accessing equity but requires you to break your term and pay associated penalties.

Open vs. Closed 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.

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 (Fixed)	Yes (Fixed)
Scotiabank	Yes (Fixed & Variable)	Yes (Fixed & Variable)
RBC	Yes (Fixed)	Yes (Fixed)
CIBC	Yes (Fixed)	Yes (Fixed)
BMO	Yes (Fixed)	Yes (Fixed)
National Bank	Yes (Fixed)	Yes (Fixed)
HSBC	No	Yes (Fixed)
Laurentian Bank	No	Yes (Fixed)
ATB Financial	Yes (Fixed)	No
First National	No	Yes (Fixed)

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.

How to Apply for a Blended Mortgage?

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

1. Contact your lender – Discuss blended mortgage options with your mortgage lender or broker. Provide details on your existing mortgage.
2. Calculate savings – Estimate your new blended rate using the formula above and determine potential cost savings vs. penalties of breaking your mortgage.
3. Complete application – Complete a mortgage refinance application and standard documentation. This includes proof of income and home value assessment.
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.
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. Refreshing your mortgage may require appraisal and legal costs, and the lender may also charge a blended mortgage administration fee.

Key Takeaways: Should You Get a Blended Mortgage?

• A blended mortgage allows you to secure a lower rate without paying hefty prepayment penalties, offering savings through a “blend” of your old and new rates.
• Blend and extend structures are most common, renewing your full remaining mortgage term when rates are blended.
• Calculate your potential new blended rate based on the current rates on offer to determine possible savings. Even small rate differences of 0.10% can equate to thousands saved over your renewed term.
• Weigh the benefits, such as payment stability and equity flexibility, against limitations, including rate transferability and potential alternative savings from breaking your mortgage.
• For maximum savings, run the numbers comparing the all-in costs of a blended mortgage against simply breaking your term, refinancing, and paying applicable prepayment penalties.
• Consult an experienced broker and current lender to review your specifics, provide quoted rates, and offer strategic insights on whether a blended mortgage aligns with your near and long-term financial objectives.

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

1. How a Blended Mortgage Works – nerdwallet.com
2. Breaking your mortgage contract – canada.ca