Blend and Extend
Your Existing Mortgage

While you’re paying down your mortgage, you may find yourself in a situation where you are considering accessing equity or looking for a lower mortgage rate; to do either, you will need to refinance your mortgage.

There are three different ways you can refinance: you can break your current mortgage term early, take out a home equity line of credit (HELOC) behind your existing mortgage or get a blended mortgage.

Before sitting down with your lender to sign the paperwork for any refinance, you should first understand the differences between your three options.


Breaking Your Mortgage


You could break your mortgage, if you wanted to access a lump sum of equity and/or obtain a lower rate in a new mortgage. By breaking your mortgage, you’re paying off your current mortgage and setting up a new mortgage entirely. Unfortunately, doing this will result in a prepayment penalty – and depending on your mortgage rate and how much time is left in your mortgage term, it can add up quickly. If you had a fixed rate mortgage, your penalty would be the greater of three months’ interest or the interest rate differential (IRD). If you had a variable rate mortgage, your penalty would be three months’ interest. If the potential savings outweigh the penalty, or if the value to you in withdrawing that money is great, it might be worth paying the fee. However, there are still other options to consider.


Taking Out a Home Equity Line of Credit (HELOC)


You could break your mortgage, if you wanted to access a lump sum of equity and/or obtain a lower rate in a new mortgage. By breaking your mortgage, you’re paying off your current mortgage and setting up a new mortgage entirely. Unfortunately, doing this will result in a prepayment penalty – and depending on your mortgage rate and how much time is left in your mortgage term, it can add up quickly. If you had a fixed rate mortgage, your penalty would be the greater of three months’ interest or the interest rate differential (IRD). If you had a variable rate mortgage, your penalty would be three months’ interest. If the potential savings outweigh the penalty, or if the value to you in withdrawing that money is great, it might be worth paying the fee. However, there are still other options to consider.


Getting a Blended Mortgage


Finally, there is one other way you can refinance to access your equity and/or get a lower mortgage rate, without having to pay the prepayment penalty: it’s called a blended mortgage and it’s an underutilized tool in mortgage financing.

A blended mortgage is when you combine the mortgage rate from an existing mortgage with the mortgage rate from a new mortgage and blend them into a new rate that is somewhere in-between the two. Because you’re essentially “keeping” your existing mortgage rate in this new blended rate, rather than breaking your mortgage term altogether, you can avoid the prepayment penalty that comes with a typical refinance. So with a blended mortgage, you wouldn’t get the absolute best mortgage rate on the market, but you also don’t need to pay any penalty upfront.

You can get a blended mortgage when you want to access equity, obtain a lower mortgage rate or both. The one thing to keep in mind is that there are two different types of blended mortgages: the “blend and extend” and the “blend to term”.


Blend and Extend


Let’s say you owe $250,000 on your mortgage, and you have two years remaining on a 5-year term with a fixed rate of 4.50%. Through a refinance, you could take on a new 5-year fixed term at just 3.39%. However, to get that rate, you’d have to pay a prepayment penalty of $10,325.

To avoid that fee, you could instead blend together your existing mortgage rate with the new mortgage rate, for a new 5-year fixed term at a rate somewhere between 3.39% and 4.50%. So, not only have you “blended” the two rates, you’ve also successfully avoided having to refinance your mortgage and pay a penalty to do so.


Blended to Term


With a blend to term, you’re “blending” the two rates in the same way as the blend and extend, but you don’t extend your mortgage term. Sticking with the example above, where you had two years left in your term, you would get a lower rate (in between your existing rate and what’s currently being offered for a 2-year term, but leaning closer to your existing rate) but it would only last for those two years remaining.

Because you’re not extending your term, your lender would lose money by slashing your rate and refinancing your mortgage without penalty. To make up the difference, a blend to term is typically only offered if you are also accessing equity, thereby increasing your mortgage amount – and the total amount you would pay your lender during the remainder of your term. If you don’t want to access equity, but you also don’t want to extend your term, your lender has the right to charge you a portion of the prepayment penalty incurred during a typical refinance.


Which Lenders Offer Blended Mortgages?



 
Created By
RATEHUB
Curated By
Tyson Gobind
Marketing and IT Manager
Reference and Notes
1. While your mortgage + HELOC can be up to 80% of your home’s value, the HELOC alone can only be 65% of your home’s value.
2. Note that if today’s lowest rate is higher than your current rate, your new rate would actually go up – not down.
3. Your mortgage + HELOC can be up to 80% of your home’s value, but the HELOC alone can only be 65% of your home’s value
4. Blend and Extend Your Existing Mortgage Page is provided by Ratehub.ca