In Canada, blending your mortgage is an alternative option to refinancing. It allows homeowners to combine their current mortgage rate with a new one or even add new funds to their mortgage balance without breaking their contract or facing penalties. Early mortgage renewals come at no cost to the mortgage holder. Canadian homeowners can combine their existing mortgage rate with a new rate, often lower, without breaking their current mortgage contract. Blending your mortgage can avoid hefty prepayment penalties while lowering your mortgage rate and overall interest-carrying costs. It may allow you to access your home equity without refinancing your mortgage in certain situations.

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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 to save 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 somewhere between your existing mortgage rate and the new, lower rate, creating a compromise that allows 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 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 for their fixed mortgage payout calculations. 

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 somewhere between the two rates, depending on your blended mortgage type chosen. 

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: The lender averages your old rate with the new market rate available 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.

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, not 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

There are a few ways you can blend your mortgage, each with its advantages depending on your financial goals:

Blend and Extend

When you blend and extend your mortgage, the lender combines your existing rate with a new lower rate and extends the mortgage term to the new lower rate. Blend and extend allows you to extend your lower rate without breaking your mortgage contract. 

Advantages:

• Lock in a lower rate for a longer term.
• Avoid prepayment penalties while reducing interest.

Example: If you owe $300,000 on a 5-year fixed mortgage with 2 years remaining on a 4.50% rate and market rates are 3.50% on a 5-year term, your new blended rate will be 3.90%, and your mortgage term will be extended by another 5 years.

Blend to Term

When you blend to term, your mortgage continues with its remaining term while applying a blended rate for the remaining time. Blend to term allows you to take advantage of a lower mortgage rate currently available in the market without increasing your remaining term. This an ideal renewal option for mortgage holders who don’t want to extend their mortgage but still want to take advantage of lower rates, as the new blended rate applies only to the remaining term.

Advantages:

• There is no need to extend your mortgage term.
• Benefit from a lower rate without penalties.

Example: If you have 2 years remaining on a 5-year term with a 4.50% rate, and market rates are 3.50%, you could blend the rates to around 4% for the next two years.

Blend and Increase

When you blend and increase, your mortgage keeps its original term while adding a blended interest rate and increasing your mortgage balance. This option allows you to take advantage of a lower mortgage rate while tapping into the equity you’ve built in your home. It’s an excellent choice for those looking to renew their mortgage who want to avoid extending the term but still wish to benefit from lower rates and the increased value of their property, as the new blended rate and adjusted mortgage amount will only impact the remaining duration of their mortgage term.

Advantages:

• There is no need to extend your mortgage term.
• Benefit from a lower rate without penalties.
• Increase your mortgage balance without refinancing.

Example: If you have 2 years remaining on a 5-year term with a 5% rate and a $400,000 balance and want to add another $100,000 to your mortgage balance, current market rates are 4%. Your blended rate will be 4.32% with the extra $100,000 added if you extend to a 5-year term or 4.80% if you decide not to extend your current remaining 2-year term.

Lenders typically only blend fixed mortgages. Therefore, if you have a variable (VRM) or adjustable (ARM) mortgage, you must pay the 3-month interest penalty to break your mortgage and start with a new term, increased mortgage balance and lower rate. However, if your mortgage is set up under a collateral charge registration, you could readvance some of the home equity within your registration’s global limit without refinancing and paying a prepayment penalty. Converting your variable mortgage to a fixed with most lenders will typically extend your mortgage to a 5-year fixed term.

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. They 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. This may be the best option if you expect rates to be lower and wish to renegotiate your mortgage once the term ends.
• Blend and Increase is best suited for someone who wants to take advantage of a lower rate while taking out equity from their home with an increased 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 mortgage rate, effectively lowering your monthly mortgage 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 with future rates: Future interest rates are difficult to predict, making it difficult to determine if a blended mortgage will save you money when your next renewal comes up.
• 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 typically calculate a blended mortgage rate by averaging the existing and new mortgage rates based on their weighted averages. If your lender allows you to blend mortgages, you can opt to blend and extend or blend to term your fixed mortgage whenever you wish without prepayment penalties. The blended mortgage rate you obtain will depend on how much time is left in your current mortgage term. When you decide to blend to term, you merge your current mortgage rate with a new rate corresponding to the remaining length of your existing mortgage.

Blend and Extend

For example, if you have a 5-year fixed mortgage at 3.5% with 3 years remaining in its term. Your lender is offering you an early renewal on a 5-year fixed mortgage rate of 3%.

• 24 months remaining at 3% 
• 36 months are completed at 3.5%
• (3.5% x 36 months) + (3% x 24 months) will need to be added and averaged over 60 months 
• [(3.5% x 36 months) + (3% x 24 months)] / 60 months = [(126) + (72)] / 60 = 198 / 60 = 3.30%

Your blended rate would be 3.30% over your 5-year term.

You could use a blend and extend mortgage calculator in Canada to simplify this calculation. 

Blend to Term

For example, if you have a 5-year fixed mortgage at 3.5% with 3 years remaining in its term. Your lender is offering you a 3-year fixed mortgage rate of 3%.

• 2 out of 5 years (24 months) are completed on your 5-year term, which equates to 40% or 24 months completed
• 3 years out of 5 years (36 months) are remaining on your 5-year term, which equates to 60% or 36 months remaining
• This means your old rate (3.5%) will make up 40% (from 24/60 months) of the weighted average, while the new rate offered by your lender (3%) makes up 60% (from 36/60 months) of your new rate.
• (40% x 3.5%) + (60% x 3%) = (0.4 x 3.5%) + (0.6 x 3%) = 1.4% + 1.8% = 3.20%

Your blended rate would be 3.20% over your remaining 3-year term.

You could use a blend-to-term mortgage calculator in Canada to find this answer quickly.

Blend and Increase

Your lender may offer the option of increasing your mortgage amount while adjusting your interest rate, allowing you to take advantage of a lower mortgage rate. This can be achieved through either blend-and-extend or blend-to-term mortgage renewal options. Sometimes, lenders may require you to increase your mortgage amount when opting for the blend-to-term option, as they might lose money by lowering your rate so far from your maturity date without penalty.

Example 1 – If you have 2 years remaining on a 5-year term with a 5% rate and a $400,000 balance and want to add another $100,000 to your mortgage balance and extend it back to 5 years with market rates of 4% on new 5-year terms, where the lender is charging you 4.1 % for the new funds.

• The weight of your old balance compared to your new mortgage balance would be 80% ($400,000/$500,000)
• The weight of the added funds compared to your new mortgage balance would be 20% ($100,000/$500,000) 
• Your average rate for the old funds would be calculated as (5% + 4%) / 2 = 4.5%
• To determine your new rate, your weighted rate would have to be calculated by adding 80% of the average rate on your old fund and 20% of your new funds rate.
• (80% x 4.5%) + (20% x 4.1%) = 3.6% + 0.82% = 4.42%

Your blended rate would be 4.42% over your renewed 5-year term.

Example 2 – If you have 2 years remaining on a 5-year term with a 5% rate and a $400,000 balance and want to add another $100,000 to your mortgage balance and blend to term with market rates of 4% on a new 3-year term.

• The weight of your old balance compared to your new mortgage balance would be 80% ($400,000/$500,000)
• The weight of the added funds compared to your new mortgage balance would be 20% ($100,000/$500,000) 
• To determine your new rate, your weighted rate would have to be calculated by adding 80% of the average rate on your old fund (5%) and 20% of your new funds rate (4%).
• Your blended rate would be calculated as (80% x 5%) + (20% x 4%) = 4.80%

Your blended rate would be 4.80% over your remaining 3-year term.

You could use a blend and increase mortgage calculator in Canada to make this calculation a breeze. 

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 if you want to stick with your current lender or if it might make sense to switch lenders after using mortgage calculators to complete a cost-savings analysis. Work out your overall savings, and see if you will save on interest-carrying costs minus your penalties and fees to break your current mortgage. It may make sense to forget your current mortgage contract and refinance into a new one.

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 looking to refinance 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 at ) plus a premium ranging from 0.5% to 2%. Adding a HELOC involves refinancing your mortgage or setting the HELOC up in the second position to your first mortgage; either option will effectively increase your mortgage rate now (with a refinance) or later (when/if you decide to pay out 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 contract terms, which could include changes in 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 could lead to a prepayment penalty. 

For a fixed mortgage, this penalty might be either 3 months’ worth of interest or the difference in interest rates on the amount you’re paying off, 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 typically offer the option to renew your mortgage early, up to 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 (FAQs) on Blended Mortgages

Final Thoughts

Blended mortgages present a unique opportunity for Canadian homeowners to optimize their mortgage terms and save on interest costs. By understanding the various types of blended mortgages—blend and extend, blend to term, and blend and increase—and carefully weighing their pros and cons against alternatives like refinancing or HELOCs, homeowners can make informed decisions aligned with their financial goals.

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 non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, 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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