Blended Mortgages in Canada

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How Blended Mortgages Save You From Prepayment Penalties

A blended mortgage in Canada is a debt restructuring option that combines an existing mortgage interest rate with a new market rate into a single weighted average. This renewal strategy allows homeowners to access lower rates or additional home equity without breaking their current contract or incurring interest rate differential (IRD) prepayment penalties.

Canadian homeowners can combine their existing mortgage rate with a new, often lower, rate without breaking their current mortgage contract. Blending your mortgage can help you avoid hefty prepayment penalties while lowering your mortgage rate and overall interest costs. It may allow you to access your home equity without refinancing your mortgage in certain situations.

According to the Financial Consumer Agency of Canada (FCAC), a blended mortgage is defined as:

Some mortgage lenders may allow you to take advantage of the current lower market interest rates by extending the length of your mortgage before the end of your term. They do this by blending your old interest rate and the new term’s rate. This is called the “blend-and-extend” early renewal option.

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Key Takeaways

• Blended mortgages allow you to take advantage of lower mortgage interest rates without paying a prepayment penalty.
• Blend and extend, or blend to term, are two mortgage blending options, each offering unique benefits for saving interest.
• Blend and increase allows you to increase your mortgage balance while taking advantage of a lower rate.

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What Is a Blended Mortgage in Canada?

A blended mortgage is a mortgage renewal option in which your current mortgage rate is combined with a new, lower rate, or in tandem with increasing your mortgage balance. The blended rate is calculated as a weighted average between your existing mortgage rate and the new, lower rate, allowing you to lower your interest payments without breaking your mortgage contract.

One of the primary benefits of a blended mortgage is that it allows you to avoid the prepayment penalties typically associated with breaking a mortgage. These penalties can be costly, especially for fixed-rate mortgages, where the penalty may be the greater of 3 months’ interest or the higher interest rate differential (IRD). The penalty is even higher at Canada’s big banks, which use the discounted IRD method to calculate fixed mortgage payouts. 

Note: Blended mortgages are not mortgages but a type of mortgage renewal transaction similar to an early mortgage renewal.

How Do Blended Mortgages Work?

Blended mortgages allow you to blend your mortgage rates by combining the interest rate of your existing mortgage with a new, lower rate. The resulting rate lies between the two rates, depending on the chosen blended mortgage type. 

For example, if your current mortgage rate is 4.50% and market rates have dropped to 3.50%, your blended rate might be somewhere between 3.90% and 4.00%, depending on the terms of your new mortgage.

Here’s a simple breakdown of how it works:

1. You keep your existing mortgage: Unlike breaking your mortgage and setting up a completely new one, a blended mortgage lets you retain your current mortgage.
2. The lender blends the two rates: it averages your old rate with the new market rate to create the blended rate.
3. No prepayment penalties: Because you’re not breaking the mortgage, you avoid the penalties typically imposed for early repayment.

Strategic Comparison: Blending vs. Refinancing

Feature	Blended Mortgage	Mortgage Refinance
Prepayment Penalty	Penalty waived (but reinvestment fees from some chartered banks may apply)	Greater of 3-Month Interest or IRD
Interest Rate	Weighted Average	Current Market Rate
Contract Status	Mortgage renewal with a new contract	New mortgage contract
Stress Test Required	No (for straight blends with no increase to remaining balance or amortization)	Yes (OSFI MQR applies to all new mortgages)
Lender Flexibility	Must stay with current lender	Can switch lenders

You can prepay part of your mortgage balance when blending or once your new term starts. However, extending your mortgage balance (equity take-out) or increasing your remaining amortization will be considered a refinance rather than a renewal. You may be required to pay a penalty to refinance with new contract terms and conditions, and depending on the lender, you may not benefit from your old rate, which is typically lower than refinance rates.

Types of Blended Mortgages in Canada

Canadian lenders typically offer three variations of the blended mortgage to suit different financial objectives.

• Blend and Extend: A blend and extend mortgage combines your current interest rate with a new market rate and resets the term length (e.g., renewing for a new five-year term). This is often referred to as an “early renewal” and is ideal for homeowners seeking long-term payment stability without the friction of a full refinance.
• Blend to Term: The blend to term option allows you to combine your existing rate with a new market rate for the remainder of your current term only. No time is added to your existing mortgage contract. Since the lender collects less interest over a shorter period, the resulting rate may be slightly higher than that of a blend and extend option.
• Blend and Increase: A blend and increase mortgage lets you borrow additional funds by tapping into your home’s equity. The lender blends the rate on your original balance with the current rate applied to the new borrowed amount, resulting in a single weighted-average rate. This strategy is highly effective for debt consolidation or home improvements.

Feature	Blend and Extend	Blend to Term	Blend and Increase
Mortgage Rate	Combines old and new rates and resets the term, typically to a new 5-year term.	Combines rates but keeps your existing maturity date.	Combines rates while adding new funds to your principal.
Primary Benefit	Locks in a lower rate for a longer period of stability.	Lowers your rate immediately without extending your contract.	Accesses home equity for renovations/debt without a full refinance.
Prepayment Penalty	No penalty, but chartered banks may charge a reinvestment fee.	No penalty, but chartered banks may charge a reinvestment /application fee.	Borrowers need a lump sum of cash for major expenses.
Best For	Borrowers seeking long-term payment certainty.	Borrowers who plan to move or fully renew soon.	Borrowers who need a lump sum of cash for major expenses.

Fixed vs. Variable Mortgage Strategy

Notably, lenders typically only offer blending for fixed-rate mortgages. If you currently hold a variable (VRM) or adjustable (ARM) mortgage, you must typically pay a 3-month interest penalty to break your contract and secure a new fixed rate.

Pro Tip: If your mortgage is registered as a collateral charge, you may be able to readvance your home equity up to your global limit without a full refinance or prepayment penalty.

Blend and Extend vs. Blend to Term vs. Blend and Increase

The decision between blend and extend,  blend to term and blend and increase depends on your specific financial situation and goals:

• Blend and Extend are ideal if you’re looking for long-term stability and want to lock in a lower rate for longer. Blend and extend are particularly helpful if you expect mortgage rates to rise.
• Blend to Term is better suited if you prefer to keep your original term length while benefiting from a lower rate for the remaining term. The best renewal option if you expect rates to decrease further and wish to renegotiate your mortgage at the end of the term.
• Blend and Increase is best suited for someone who wants to take advantage of a lower rate while taking out equity from their home by increasing their mortgage balance.

Why Choose to Blend Your Mortgage Rate?

Blended mortgages are attractive for homeowners for several reasons:

• Avoid prepayment penalties: Breaking a mortgage early can incur significant penalties, especially with fixed-rate mortgages. A blended mortgage allows you to avoid these fees while lowering your rate.
• Access lower rates: Blending your mortgage should always lower your rate, reducing your monthly payments and total interest paid.
• Access your home equity: Blending your mortgage rate while increasing your mortgage balance will allow you to take out some of your home’s equity without refinancing your mortgage.

When Should You Choose to Blend Your Mortgage Rate?

A blended mortgage might be the right choice if:

• You want to lower your rate but avoid penalties: Blended mortgages allow you to benefit from lower mortgage rates without incurring prepayment fees.
• You don’t want to extend your mortgage term: With a blend-to-term mortgage, you can take advantage of lower rates without extending your repayment period.
• You need more money but don’t want to pay penalties: By blending and increasing your mortgage, you can take advantage of your trapped home equity without refinancing your mortgage and paying a penalty.

Pros and Cons of Blended Mortgages

Pros:

• No penalties: Since you aren’t breaking your mortgage contract, there are no prepayment penalties.
• Lower interest rates: You can benefit from reduced interest rates even if you’re in the middle of a fixed-term mortgage.
• Take-out home equity: Allows you to access your home equity without a prepayment penalty.

Cons:

• It’s not always the cheapest option. Conducting a cost-savings analysis is prudent, as in some cases, paying the prepayment penalty and switching to a new mortgage may offer a lower overall rate.
• Uncertainty about future rates: Interest rates are hard to predict, making it hard to determine whether a blended mortgage will save you money at your next renewal.
• Prepayment penalties could increase: If you need to pay off your blended mortgage early, your penalty could increase if you have increased your mortgage amount (blend and increase) or the remaining term (blend and extend).

How to Calculate a Blended Mortgage Rate

Lenders calculate your new rate using a weighted average. The portion of your mortgage with more time left has more influence on the final rate, so the blended rate ends up closer to that portion’s interest rate.

Basic Blended Rate Formula:

1. Old Rate Weight: (Current Rate % × Months Remaining)
2. New Rate Weight: (Market Rate % × Months in Extension/New principal portion)
3. Final Blended Rate: (Old Weight + New Weight) ÷ Total Months or Total Principal

Blend and Extend Example

If you owe $300,000 at 4.50% with 24 months left, and current 5-year rates are 3.50%:

(4.50% × 24) + (3.50% × 36 extension months) ÷ 60 total months = 3.90% Blended Rate.

Blend and Increase Example

If you have $400,000 at 5.00% and want to add $100,000 in new equity at a market rate of 4.00%:

($400k × 5.00%) + ($100k × 4.00%) ÷ $500k total = 4.80% Blended Rate (if keeping your current term).

Alternatives to Blending Your Mortgage

The options for blending your mortgage depend mainly on your financial goals and mortgage strategy. You should ask yourself whether you are simply looking for a lower rate or to take out some of your home equity. Additionally, you should ask yourself whether you want to stick with your current lender or switch lenders after using mortgage calculators to complete a cost-savings analysis. Work out your overall savings and see whether you will save on interest-carrying costs, minus your penalties and fees, to break your current mortgage. It may make sense to refinance your current mortgage.

Home Equity Line of Credit

A home equity line of credit (HELOC) allows homeowners to access funds based on the equity they have built in their property. Usually, individuals seek a HELOC when obtaining a new mortgage to purchase a home or when refinancing their existing mortgage. With a HELOC, you can borrow as much as 65% of your home’s total value minus the amount you still owe on your mortgage, and this is provided as a flexible line of credit. 

The interest rates for HELOCs can differ between lenders. HELOCs typically start at the lender’s prime rate (currently 4.45%) plus a premium of 0.5% to 2%. Adding a HELOC involves refinancing your mortgage or placing the HELOC second on your first mortgage; either option will effectively increase your mortgage rate now (with a refinance) or later (when/if you decide to pay off the two positions by refinancing).

Mortgage Refinance

When you refinance your mortgage, you’re essentially paying off your current mortgage and taking out a new one with new terms, which may include changes to the mortgage amount, interest rate, or repayment schedule. Most homeowners refinance to secure a lower interest rate or access the equity they’ve built in their home. However, it’s crucial to understand that refinancing means breaking your existing mortgage agreement, which may result in a prepayment penalty. 

For a fixed mortgage, this penalty might be either 3 months’ interest or the interest rate differential (IRD) whichever is greater. On the other hand, variable (VRM) and adjustable (ARM) mortgages typically incur just 3 months’ interest as a penalty. If your mortgage is currently default-insured, refinancing will dissolve that coverage. Additionally, be prepared to cover other costs related to refinancing, such as legal fees, home appraisal and discharge fees.

Early Mortgage Renewal

Most lenders offer the option to renew your mortgage early, typically 30 to 180 days before the contract expires. If you have less than 6 months left on your mortgage, speak with your lender to determine how you can benefit from this early renewal to lock in a better interest rate.

Frequently Asked Questions (FAQ) About Blended Mortgages in Canada

Final Thoughts

Navigating mortgage debt requires more than just chasing the lowest rate. As we have explored, a blended mortgage offers a strategic middle ground for Canadian homeowners looking to optimize their interest costs without the heavy financial burden of prepayment penalties.

Whether you choose to use the blend and extend option for long-term stability or use the blend and increase option to tap into your home’s equity, you can soften the impact of current market volatility. As borrowing costs fluctuate, our mortgage rate forecast is essential for timing your blend and extend decision

If you’re considering a blended mortgage or exploring other mortgage options, contact our nesto mortgage experts today. Our mortgage experts can provide personalized guidance and support your mortgage strategy.

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Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and the quality of their advice. nesto aims to transform the mortgage industry by providing honest advice and competitive rates through a 100% digital, transparent, and seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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