How a Blend-and-Extend Mortgage Can Save You Money
Date: August 19, 2024
If you have a mortgage and interest rates are beginning to drop, you may be wondering how you can take advantage of these shifting market conditions. A blend-and-extend mortgage can be a great option while rates remain higher than the record low interest rates we saw in March 2020 as The Bank of Canada cut its overnight interest rate to 0.25 per cent.
Keep reading to learn how a blend-and-extend mortgage works, how it can save you money, and the information you’ll need to apply for one.
What is a Blend-and-Extend Mortgage?
Westoba’s Financial Consultant, Tracy Houck, explains that a blend-and-extend mortgage is one in which a mortgage holder is able to take out additional equity (if approved) and/or extend the length of the mortgage before the end of a mortgage term. This is accomplished by blending the current interest rate with the new term’s rate at the time you apply, resulting in a new rate that lands somewhere in the middle. Your term is then reset for up to a 5-year term. “This is a great way to help our members take advantage of lower interest rates without needing to incur a penalty for breaking their term,” Tracy says.
So, for example, if you’re three years into a five-year fixed term at 5.2%, and current rates are sitting at 4.7%, you would blend those rates and reset your fixed term back to five years, paying a rate somewhere between 5.2 and 4.7). This does apply to a new property when you move if it makes the most sense for your situation.
What Are the Benefits?
Blend-and-extend mortgages offer homeowners more stability while also providing the opportunity to take advantage of lower interest rates. You can take advantage of the changes in the rate of inflation that we’ve seen recently – especially as they go down.
This process also allows you to take advantage of your home’s current equity before your mortgage term is up. And, because you’re not breaking your mortgage contract, you get the added benefit of avoiding being charged any penalties. Paying a lower monthly mortgage cost also means that you’re freeing up capital for other things – investments, home improvements, or savings.
A blend-and-extend mortgage is the best option when you can anticipate that mortgage rates will stay higher. As rates start to decrease, you can lower your payment and take advantage now instead of waiting until you are up for renewal.
What Does it Cost to Break My Mortgage Contract?
If you decided that you’d prefer to break your contract and renegotiate your mortgage rate or switch financial institutions to take advantage of a lower rate, you would need to pay a prepayment penalty and any discharge fees. So, while it could be financially beneficial to break your contract to take advantage of a lower interest rate, you need to ensure that the overall savings outweigh the costs of the prepayment penalty and fees.
It’s important to talk to a mortgage specialist to determine which is the best option for you and your financial situation.
How Do I Make the Switch?
If you and your mortgage specialist determine that a blend-and-extend mortgage is the best option for you, the switch is relatively simple. Tracy Houck explains that a credit application is required when refinancing, adding additional funds, or increasing amortization.
"The only exception to this is a renewal with no new money and no change in amortization, which is treated as a normal renewal,” Tracy explains. “In that case, we can get this done fairly quickly and without providing further documentation.”
Your mortgage specialist can help explain how to calculate your blend-and-extend rate; however, the key elements include: your existing principal balance, your existing interest rate, the remaining term left on the mortgage, new money being added to the mortgage (such as home equity), the new interest rate offered, and the new term offered.
If you want to take advantage of current market conditions and you’re nearing the end of your term, now’s the time to consider applying for a blend-and-extend mortgage. Our team of experts is here to help you navigate your mortgage to ensure that you’re getting the best rate and can prepare for your financial future. Contact one of our Mobile Mortgage Specialists or make an appointment with an advisor today to see if a blend-and-extend mortgage is right for you.
