Blended Mortgages Explained: Lower Rates, No Penalties? You Decide!

Are you considering revising your mortgage rates to benefit from new mortgage trends without changing your current contract?

A blended mortgage is your entry point. It combines your existing mortgage with a new one, merging the interest rates. It pairs your current rate with a lower rate for the new amount borrowed. This adjustment aids in controlling your total interest expense. Including no penalties and potential savings with the lower rates. Blended mortgages come in two types: ‘blend-and-extend’ and ‘blend-to-term’.Blend-and-extend vs. Blend-to-term

Blend-and-Extend Mortgage: Blend-to-Term Mortgage:
Blend-and-extend means merging your existing mortgage rate with the lender’s current rate while stretching your mortgage duration. If you were midway through a five-year term and opted for a blend-and-extend mortgage, you’d lock in the new rate, potentially resetting your term for another five years. It is ideal for those seeking stable, extended payment periods. With blend-to-term, you can blend the rates, but your term remains unchanged. If you have two years left in your term, your new blended rate lasts for that duration. It might lead to a slightly higher rate due to the shorter term. It is a good option for homeowners who are confident of attaining lower mortgage rates.

How can I get a blended mortgage?

To secure a blended mortgage, take the proactive step of approaching your bank or mortgage lender directly. It is better to initiate this discussion, as they won’t reach out to inform you if you could be saving on interest payments. Taking charge of your financial choices is essential.

Pros and cons of blended mortgage:

Pros of a Blended Mortgage:

  • Lower Interest Rates: A primary advantage is obtaining a reduced interest rate, potentially saving money over your mortgage term.
  • Avoid Prepayment Penalties: While administrative fees might apply, they’re usually lower than the costs of breaking a fixed-rate mortgage, which often includes significant penalties.
  • Unlock Home Equity: It allows tapping into home equity for renovations or debt repayment.

Cons of a Blended Mortgage:

  • Inflexibility in Moving: Blended mortgages combine your current mortgage rate with a new lower rate. However, unlike regular mortgages, you can’t move a blended mortgage to a different house as it is tied to your existing property.
  • Potential Cost Concerns: Calculating costs is crucial. Sometimes, breaking your existing mortgage, paying pre-payment penalties, and getting a new mortgage might be cheaper.
  • Vulnerability to Rate Increases: The uncertainty surrounding interest rates complicates identifying the better choice between blend-and-extend and blend-to-term mortgages.

Blended Mortgages vs HELOCs

HELOCs offer ongoing access to equity, while a blended mortgage provides a one-time withdrawal. HELOCs might have lower rates for borrowed amounts but generally carry higher rates. Blended mortgages necessitate larger payments, covering both interest and principal, unlike HELOCs, which often require only interest payments.

Blended Mortgages vs Refinancing

Choosing between a blended mortgage and refinancing hinges on existing and current rates. Refinancing offers a new rate for the entire mortgage amount, potentially yielding lower rates. On the other hand, a blended rate presents partial exposure to the new rate. If current rates drop significantly, refinancing despite penalties might save more. The choice depends on individual circumstances and long-term financial goals.

Blended Mortgages HELOCs Mortgage Refinance
What is the maximum amount I can borrow? A maximum of 80% of your home’s current value is allowed. A maximum of 80% of your home’s current value is allowed. A maximum of 80% of your home’s current value is allowed.
Will it change my mortgage rate? Partially No Yes
Do you need to pay a mortgage penalty? No No Yes
When can you access your home equity? In the beginning. Anytime In the beginning.

How to calculate blended mortgage rate?

(original term-remaining term)/ original term=a1-a=b

(a*new mortgage rate)+ (b*old mortgage rate)= blend-and-extend mortgage rate.

(a*old mortgage rate)+ (b*new mortgage rate)= blend-to-term mortgage rate.

Let’s break down a blend and extend the mortgage scenario. Imagine a $500,000 mortgage at a 3% fixed rate for five years. After three years, you’ve got two years left. Your lender offers a 2% rate for a 2-year term. What’s your new blended rate?

Here’s the calculation(Blend-and-extend):

You’ve completed 60% of your 5-year term (3 out of 5 years done).

So, 40% of your term remains (2 out of 5 years left).

Now, apply these percentages to your rates:

60% completed at 3% = 1.20

40% remaining at 2% = 0.80

Add these up: 1.20 (from the completed term) + 0.80 (from the remaining term) = 2.00

Your new blended rate for a 5-year term is 2.00%.

Blend-to-term rate calculation

Let us understand a blend-to-term mortgage with the same $500,000 mortgage with a fixed 3% rate for five years, where three years have passed. Your lender offers a 2% rate for a 2-year term. What’s your blended rate for a blend-to-term mortgage? Here’s how it’s calculated:

You’ve completed 60% of your 5-year term (3 out of 5 years done).

So, 40% of your term remains (2 out of 5 years left).

Now, apply these percentages to your rates:

60% completed at 3% = 1.80

40% remaining at 2% = 0.80

Add these up: 1.80 (from the completed term) + 0.80 (from the remaining term) = 2.60

Your new blended rate for the remaining 2-year term is 2.60%. The rate leans toward the 3% rate because it was active for a more significant portion of your mortgage. If you had more years remaining, it would lean more towards the new 2% rate.

Canadian lenders offering blended mortgages:

Many lenders across Canada, including BMO, CIBC, MCAP, Manulife One, National Bank, PC Financial, RBC, Scotiabank, TD, Coast Capital, and ING DIRECT, offer Blended mortgages. These mortgages provide borrowers with a wide array of options to choose from.

Average Ontario blended mortgage rates:

5-year fixed: 6.28%
3-year fixed: 5.96%
5-year variable: 6.58%

The Bottom Line

Whether you’re a seasoned homeowner or a first-time buyer, this option offers attractive advantages. Lower rates, accessible equity, and avoiding mortgage prepayment penalties are ways a blended mortgage can benefit your financial strategy. But remember to carefully consider your financial goals, mortgage terms, and future plans. Whether you’re curious about blends or any other mortgage-related concern, Pegasus Mortgage Lending INC is your dedicated partner. Contact us today, and let’s blend your mortgage dreams into reality!

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