What are Blended Mortgages?
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If you’re in a situation where you want to access equity in your home or capitalize on lower interest rates, you might want to consider a blended mortgage. As an alternative to a HELOC or breaking your term early – which comes with significant penalties – a blended mortgage is a great way to lower your interest rate or free up some of the equity in your home, by combining your current mortgage rate with a new one. In this post, we’ll take you through the context in which a blended mortgage could work as an alternative to other forms of refinancing, and help you understand the different kinds of blended mortgages.
- There are a number of options available if you’re thinking of refinancing your home. These include blended mortgages, breaking your term early, or getting a HELOC
- Blended mortgages are a good alternative to breaking your mortgage early, since you won’t have to pay a prepayment penalty with a blended mortgage
- With a blended mortgage, you can either blend it with a new rate for the remainder of your current term, or extend your term
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What is a blended mortgage?
There are many different ways to change your mortgage rates. You could consider breaking your term early if you see a lower rate that you want to capitalize on, but you would probably have to pay a prepayment penalty for finishing your current term early. Another option available to homeowners is what’s known as a blended mortgage. A blended mortgage combines your current rate with a lower market rate, and you won’t have to pay a prepayment penalty. As a tradeoff for not having to pay any penalty, a blended mortgage doesn’t provide you with the lowest rate on the market, but essentially blends your current rate and the new, lower rate, into a rate somewhere between the two. A blended mortgage can be a good idea for people who want to lower their mortgage rate without paying a penalty, or who need to access some of the equity in their home.
Options for refinancing your mortgage
If you’re looking to access equity in your home, or want to lower your interest rates, you will need to think about refinancing your mortgage. There are a few options available when people talk about refinancing, including breaking your mortgage term, taking out a home equity line of credit (HELOC), or getting a blended mortgage. Each option has its advantages and is context-dependent. If interest rates have dropped considerably and you have a fixed-rate mortgage that’s not come to term, for instance, it may be better to break your mortgage early and pay the prepayment penalty. However, there are a couple of other options available to you, like a HELOC or blended mortgage.
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Breaking your mortgage
As we mentioned, breaking your mortgage is one way to access a lower market rate. It’s also sometimes used to access some or all of the equity from your property. Breaking your current mortgage means you are paying it off and setting up a new loan altogether. Generally, this will incur a prepayment penalty. Depending on how much time is left on your current term, this fee can be considerable. According to the Canadian government, the fees you will pay depend on the following:
- The amount you want to prepay (or pay off early). In the case of a broken mortgage, this would be the entire balance remaining
- The number of months left until the end of your term
- Your interest rates
- The method the lender uses to calculate the fee
For a fixed-rate mortgage, the penalty is generally about three months’ interest, or what’s known as the interest rate differential (IRD). Whichever of these figures is the highest is the fee you’ll pay. The lender will usually use the IRD instead if your mortgage interest rate is higher than the current market rate, and if you signed your current contract within the last five years. If you really want to access your equity this way, or the difference in interest rates is considerable enough, it could be worth taking the hit on prepayment penalties and breaking your mortgage.
Taking out a HELOC loan
A HELOC, or home equity line of credit, is a different way to access equity in your home, however, it has no impact on your current mortgage’s interest rate. A HELOC is a revolving line of credit, and not a lump sum loan, like a home equity loan, or what you would get from refinancing. HELOCs provide up to 80% of the equity of your home, minus your current balance owing, as a revolving credit line. In essence, the more you pay off your mortgage, the higher your HELOC could be. You will need a minimum of 20% equity in your home in order to qualify for a HELOC.
The main difference between a HELOC and a blended mortgage or breaking your mortgage is that a HELOC is a separate product. You only pay for interest on what you borrow each month (similar to a credit card) on top of your existing mortgage payment. HELOCs are valued for their flexibility, and for the fact that you don’t have to pay a prepayment penalty to access your equity.
Getting a blended mortgage
A final way to access your equity or lower your interest rates – without the prepayment penalty – is to get a blended mortgage. A blended mortgage isn’t as common as the previous two methods we’ve talked about, but it’s a really useful way to circumvent some of the fees for breaking your mortgage early. With a blended mortgage, you are essentially blending together one mortgage rate with another. When we talk about blended mortgages, we’re also talking about two specific types: blend and extend, and blend to term. Here’s a breakdown of both:
Blend and extend
A blend and extend mortgage involves blending your current mortgage with another, and extending the length of your term. For example, If your current mortgage rate is fixed at 4% and you have two years left of a five year term, but you want to access the current market rate of 2.5%. By blending and extending your mortgage, you could access a rate around the 3.29% mark, without paying a prepayment penalty for breaking your term. You would also extend your term by three years, resetting your new mortgage to a five year term. If you also wanted to access some of the equity in your property, your new rate would reflect that by being slightly higher, since your lender is giving you even more money.
Blend to term
A blend to term is like a blend and extend, in that you’re still blending two rates. Here, however, rather than extending your term, you would simply finish up your current term at a new rate. So if you still had a year left on your term, you’d only have a year left even at the new blended rate. Once your term matures, you would get a new mortgage. A blend to term mortgage is ideal in situations where you believe the market rate will continue to drop while you’re relatively close to the end of your term. That way, when you need to get a new mortgage, you’ll be well positioned to capitalize on lower market rates when your term does expire.
Since your not extending your term, your lender will generally only offer a blend to term mortgage when you’re also accessing equity, since this increases your total mortgage amount (the money you owe your lender overall). If you aren’t accessing equity or looking to extend your term, your lender may get you to pay a portion of the prepayment penalty you would incur through a traditional refinance.
Mortgages are really all about tradeoffs. With something like a blended mortgage, you’re able to access a lower rate than your current mortgage by blending it with a new mortgage. You won’t have to pay a prepayment penalty for breaking your term early, but you’ll also not be able to access the lowest rate available on the market, since a blended mortgage combines a lower, new mortgage rate, with your existing (and presumably higher) rate. Ultimately, blended mortgages are great if you want to lower your rates without paying a penalty – assuming you’re accessing equity or extending your term. They are a flexible alternative to breaking your mortgage early, and allow you to access equity as a lump sum payment, unlike a HELOC. If you’re unsure about refinancing and need to speak to a professional, get in touch with our team today.
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