As inflation continues to rise – Canada’s inflation rate rose to 4.4% in April 2023 – due in part to the higher costs of food, real estate, and vehicles, the Bank of Canada indicated that rate increases may still be in our future to tamper inflation.
So, if you’re feeling the crunch of interest rate hikes, now is the time to consider a blend-and-extend mortgage to mitigate the effect of rate increases. Keep reading to learn about 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 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 4.1%, and current rates are sitting at 2.6%, you would blend those rates and reset your fixed term back to five years, paying a rate lower than your initial 4.1% (somewhere between 4.1 and 2.6).
However, it’s important to note that a blend-and-extend mortgage can’t be transferred to a new property when you move. So, if you plan to sell your home before your term is up, this type of mortgage won’t apply to you.
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 before they’re predicted to increase.
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 rise and you’re coming close to renewing your term. By switching to blend-and-extend, you can avoid taking the risk of higher interest rates – something we know will continue to happen in years to come – when it’s time to renew.
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 lenders to take advantage of a lower rate, you would need to pay a prepayment penalty and any lender fees. You also run the risk of not qualifying for a new mortgage once you break your contract. 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 an 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. In that case, we can get this done fairly quickly and without providing further documentation,” she says.
Your mortgage specialist can help explain how to calculate your blend-and-extend rate; however, the key elements involved include: your existing principal balance, your existing interest rate, the remaining term left on the mortgage, and new money being added to the mortgage (such as home equity), the new interest rate offered, and the new term offered.
You can roughly calculate your new interest rate in the following steps:
- Multiply your current interest rate by the number of months remaining on your term
- Subtract the number of months of the new term offered from those remaining on your current term
- Multiply the result of [2] by the current interest rate
- Add the results of [1] and [3]
- Divide the result of [4] by the number of months in the new term offered
If you want to take advantage of current mortgage rates before they are predicted to increase over the next while 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.
