What is Blend and Extend Mortgage?

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What is a Blended Mortgage?

A blended mortgage allows you to:

1. Change your mortgage rate (Blend)
2. Renew your mortgage term (Extend)
3. Borrow more money using your home equity

You can “Blend and Extend” your mortgage before your mortgage is up for renewal, and you won’t have to pay any mortgage break penalties. Another type of blended mortgage, “Blend to Term”, lets you blend in a new mortgage rate while not extending your mortgage term.

Blend and Extend Mortgages

A blend and extend mortgage lets you take advantage of current low mortgage rates and to renew your mortgage immediately. You won’t have to wait until the end of your mortgage term to renew your mortgage, as you won’t be charged any mortgage penalties for refinancing your mortgage early. With a blend and extend, you'll be mixing your old interest rate with a new interest rate that your lender is offering. Your blended mortgage rate will be in between these two interest rates. Your mortgage will then be renewed for another term.

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 and Extend Mortgage Rate Calculation

To see how a blend and extend mortgage works, let's take a look at a $500,000 mortgage that has a fixed mortgage rate of 3% for a 5-year term. Three years have passed, which means that there are two years left in your mortgage term. Your lender is offering a 2% mortgage rate for a 2-year fixed rate mortgage term. What will your blended mortgage rate be?

• Mortgage balance: $500,000
• Your mortgage rate: 3%
• Mortgage term: 5 years
• Mortgage term remaining: 2 years
• Current mortgage rate offered by your lender: 2%

Here are the steps to calculating the blended mortgage rate for a blend and extend mortgage:

1. Your mortgage rate and the new mortgage rate offered by your lender will be weighted based on the mortgage term remaining. You have 2 years remaining in a 5-year term, which means that you have completed 60% of your mortgage term, with 40% of your mortgage term remaining.

   2 years remaining / 5-year term = 40% remaining

   3 years completed / 5-year term = 60% completed

2. Next, apply your mortgage rates to these weights. You have already completed 60% of your mortgage by paying a mortgage rate of 3%. Since you have two years remaining, that means your mortgage will be extended by another three years to make up another full 5-year term.

   This 3-year extension will be based on the new mortgage rate offered, which is 2%. The two years remaining on your old mortgage will still keep your old rate of 3%.

   60% remaining at 2% = 1.20

   40% completed at 3% = 1.20

3. Finally, add up these two values to get your blended mortgage rate.

   1.20 + 1.20 = 2.40%

   The blended mortgage rate will be 2.40% for a 5-year term. The mortgage balance has no effect on your blended mortgage rate since the mortgage amount stays the same. If you choose to borrow more money, it will shift the weights in this calculation. This is called a Blend to Increase.

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. At the end of your term, you can renew, refinance, or switch lenders as usual. For example, if you have 2 years until your renewal date for a 5-year mortgage, then a blend to term will give you a blended rate that will apply for only 2 years.

Blend to Term Mortgage Rate Calculation

Let's take a look at the same mortgage example from above but for a blend to term. You have a mortgage that has a fixed rate of 3% for 5 years, and three years have passed. At current market rates, your lender is offering a 2% mortgage rate for a 2-year term. What will your blended mortgage rate be with a blend to term?

• Mortgage balance: $500,000
• Your mortgage rate: 3%
• Mortgage term: 5 years
• Mortgage term remaining: 2 years
• Current mortgage rate offered by your lender: 2%

Here are the steps to calculating the blended mortgage rate for a blend to term mortgage:

1. Your mortgage rate and the new mortgage rate offered by your lender will be weighted based on the mortgage term remaining. You have two years remaining in a 5-year term, which means that you have completed 60% of your mortgage term, with 40% of your mortgage term remaining.

   2 years remaining / 5-year term = 40% remaining

   3 years completed / 5-year term = 60% completed

2. The difference with a blend to term is the weights that are used for the new and old mortgage rates. You will apply the percentage of the mortgage term completed with your old mortgage rate, and the percentage of the mortgage term remaining with your new mortgage rate. This is the opposite of a blend and extend calculation.

   40% remaining at 2% = 0.80

   60% completed at 3% = 1.80

3. Finally, add up these two values to get your blended mortgage rate.

   0.80 + 1.80 = 2.60%

   The blended mortgage rate will be 2.60% with a blend to term for the remaining two years of your term. Notice how this rate leans towards your 3% rate. That’s because the 3% rate was active for a larger portion of your mortgage. In other words, there’s less time for the lower 2% rate to be active. For example, if your mortgage term had four years remaining, then your blended rate will lean more towards the new 2% rate. If your mortgage term has one year remaining, your blended rate will lean more towards your old 3% rate.

How can I calculate my blended mortgage rate if I borrow an additional amount?

If you increase your mortgage amount in order to borrow money, your blended mortgage rate will be calculated differently. This is because your new mortgage will be larger than your old mortgage, which will cause it to affect your weighted average rate.

Let's first take a look at calculating a blended mortgage rate for a blend and extend mortgage with an increased mortgage amount. You currently have a $500,000 mortgage with an existing mortgage rate of 3% for a 5-year term, and three years have passed. Your lender is currently offering a 2% rate for a 2-year term, and you decide to borrow an additional $100,000.

Existing Mortgage

• Balance: $500,000
• Mortgage Rate: 3%
• Remaining Term: 24 months (2 years)

Blend with

• Mortgage Amount Increase: $100,000
• New Mortgage Rate: 2%

To calculate your blended rate, follow these steps:

1. Calculate your Weighted Average Rate

   You will need to first find the weighted average rate since your mortgage amount will be changing. First, multiply your existing mortgage balance by your existing interest rate, then divide by your new mortgage amount. Repeat the same by multiplying the amount that you are increasing your mortgage by with your new mortgage rate. Add these two numbers together to get your weighted average rate.

   ($500,000 x 3%) / $600,000 = 2.50%

   ($100,000 x 2%) / $600,000 = 0.333%

   2.50% + 0.333% = 2.833%

2. Calculate your term lengths

   Your weighted average rate will apply for the time remaining in your existing term, while your new mortgage rate will apply for the time of your new term subtracted by the time remaining on your existing term.

   New term length = 60 months (5 years)

   Remaining on existing term = 24 months (2 years)

   New term - remaining on existing term = 36 months (3 years)

3. Calculate your blended mortgage rate

   Multiply your new mortgage rate by your new term less minus your remaining existing term. Then divide this by your new term length. Repeat this by multiplying your weighted average rate by your remaining existing term, then divide by your new term length. Finally, add these two values together to get your blended mortgage rate.

   (2% x 36 months) / 60 months = 1.20%

   (2.833% x 24 months) / 60 months = 1.133%

   1.20% + 1.133% = 2.33%

   Blended mortgage rate = 2.33%

   The blended mortgage rate would be 2.33% for a 5-year term for a $600,000 mortgage. This includes increasing your mortgage by $100,000 from $500,000 for a blend and extend. If you want to borrow an additional amount with a blend to term mortgage, your blended mortgage rate will simply be your weighted average rate.

Blended Mortgages vs HELOCs and Refinancing

Besides a blended mortgage, a HELOC is a way for homeowners to borrow more money before their term is over. You won't need to pay a mortgage prepayment penalty, and just like with a blended mortgage, you can use it to access your home equity. However, the main difference is that a HELOC will not lower your entire mortgage rate if current market rates are lower. Instead, you'll only get a lower interest rate on the money that you borrow from your HELOC. Also, HELOC rates are often higher than mortgage rates.

A blended mortgage only lets you access your equity once rather than allow ongoing access that a HELOC provides. You will also have to make regular mortgage payments, which include both interest and principal payments, while a HELOC can feature only interest payments. This makes blended mortgage payments larger than HELOC payments.

When comparing getting a blended rate versus refinancing your mortgage and paying a break penalty, it will depend on the differences in rates. A mortgage refinance lets you obtain the mortgage rate being offered for your full mortgage amount, while a blended rate only gives you partial exposure to the new mortgage rate. If current mortgage rates are significantly lower than your existing rate, it might be worthwhile to pay a mortgage penalty to refinance. 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.

For example, if your existing mortgage rate is 3% and current mortgage rates are 2%, then you can refinance at a rate of 2% and pay penalties or get a blended rate and avoid penalties. Your blended rate might not be as low as 2%, but it will be less than 3%.

With all three options, you are still only able to 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.

Blended Mortgage Lenders

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 you are purchasing a home and transferring your mortgage over. 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 the expiry of your existing mortgage term.