What is Blend and Extend Mortgage?

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What is a Blended Mortgage?

With blended mortgages, you can blend your existing mortgage rate with a new mortgage without paying any mortgage break penalties. With a “Blend and Extend,” you can renew your mortgage for a new term when blending, whereas with “Blend to Term,” you can blend in a new rate without extending the mortgage term.

Blended mortgages can be considered an alternative to mortgage refinancing and HELOC when you want to access your home equity. The three options are compared below:

*The total mortgage + HELOC can be 80% of the home’s value, but the HELOC alone cannot be more than 65% of the home’s value.

Blend and Extend Mortgages

When the current mortgage rates are lower than your existing mortgage rate, a Blend and Extend mortgage lets you take advantage of the low mortgage rates and renew your mortgage immediately without paying prepayment penalties. Your old interest rate is combined with your lender's current interest rate, and the blended mortgage rate is in between the old and new rates. Meanwhile, if the current rates are higher than your existing rate, then the blended rate would be higher than your existing rate. Your mortgage will be renewed for a new term without waiting till the end of the current term.

For example, let’s assume you have a fixed rate of 4% with three years left on a five-year term. Suppose the mortgage rates have now dropped to around 2%, and you decide to blend and extend. Then, your mortgage would be renewed for a new five-year term at an interest rate between 2% and 4%, such as 3.20%. You can use WOWA’s blended mortgage rate calculator to estimate your blended mortgage rate.

Some lenders may still charge a prepayment penalty. They can include this penalty into your blended mortgage rate by making the blended rate higher or by charging the penalty upfront.

Blend to Term

With a blend-to-term, you are still blending your old mortgage rate with a new mortgage rate, but you won’t be extending or renewing your mortgage for another term. Instead, your new blended mortgage rate will only be used for the remainder of your current term. For example, if you have two years until your renewal date for a five-year mortgage, then a blend to-term will give you a blended rate that will apply for only 2 years. At the end of your term, you can renew, refinance, or switch lenders as usual.

Pros of Blended Mortgages:

• You can get a lower interest rate immediately if the ongoing market rates are lower than your current rate.
• You won’t have to pay penalties for breaking your current mortgage.
• You can access your home equity.

Cons of Blended Mortgages:

• Sometimes, it may be cheaper to pay the prepayment penalty and refinance at a much lower rate
• You will have to pay interest on the entire equity accessed from the beginning, even if you don’t need it all at once.

While blended mortgages, HELOC (Home equity line of credit) and mortgage refinancing are all ways of accessing your home’s equity, the three have some key differences.

Prepayment Penalty: Besides a blended mortgage, a HELOC is a way for homeowners to borrow more money using their home’s equity before their term is over. In both cases, you don’t have to pay a mortgage prepayment penalty. Meanwhile, if you refinance, you must pay a penalty for breaking your current mortgage.

Mortgage Rate: A blended mortgage will lower your mortgage rate if the current mortgage rates are lower than the rate you have by blending the two rates. A HELOC will not affect your mortgage rate. Instead, you'll only get a lower interest rate on the money you borrow from your HELOC. Also, HELOC rates are often higher than mortgage rates. If you refinance, you will get the new rate being offered in the market.

Access to Home Equity: Blended mortgages and refinancing only let you access your equity once rather than allow ongoing access that a HELOC provides. With all three options, you can still only borrow up to 80% of the value of your home. Your blended mortgage or a mortgage after a refinance can’t be for more than 80% of your home’s value. A HELOC on top of an existing mortgage can’t have a combined borrowing amount that’s more than 80% of your home’s value either. If you don't have an existing mortgage, then a HELOC on its own can't be for more than 65% of your home's value.

Mortgage Payments: If you get a blended mortgage or refinance, you must make regular mortgage payments, including mortgage interest and principal payments. On the other hand, HELOCs could offer interest-only payments.

The best option will depend on the circumstances. If current mortgage rates are significantly lower than your existing rate, paying a mortgage penalty to refinance might be worthwhile. If rates aren’t that much lower, but you want to renew your mortgage early, then a blend and extend can still be a good option. Meanwhile, it may be better to get a HELOC if you don’t need to access the entire amount at once. With a HELOC, you can just borrow the amount you need and pay the interest for it rather than paying the interest on the entire amount from the beginning.

Not all mortgage lenders offer blended mortgages. Some lenders, like RBC, only offer blended mortgages if you’re porting your mortgage to another property, such as when purchasing a home and transferring your mortgage. Others might only allow blend and extend if you pay a mortgage penalty.

Some lenders may also have certain requirements in order for you to blend and extend mortgages. For example, Coast Capital only allows you to blend and extend if you are borrowing at least an additional $50,000 to your mortgage amount or if the new term is longer than at least three years after your existing mortgage term expires.