The Bank of Canada is signaling a faster pace in rate hikes. Here’s what it means for you and your blend and extend mortgage.
According to the recent forecast, published by the entity, the first hikes in rates can already start as early as April of 2022, ending the era of record low-interest rates three months earlier than previously expected. Meanwhile, the number of people with several active mortgages continues to rise. According to Equifax, it has climbed almost 8% and more people now probably would like to seek ways of reducing their payment obligations and to save up some money without breaking a mortgage. Opting for a blended rate is one of them.
What is a blended rate
At the time of applying for a mortgage, you have two types of rates: a fixed rate and a variable one. Once you have chosen a fixed rate and started to pay off your mortgage, you can find out that the rate offered for new mortgages is significantly lower than the one you already have. In this case, you can ask your lender to reconsider your mortgage rates and to calculate a blended rate for you.
Types of blended rates
Typically a new blended rate falls somewhere in between the one you have and the rate offered for new mortgages. It helps you to reduce the amount of payment without breaking any contract commitments. There are two types of blended rates. A blend-and-extend rate supposes that you technically keep your existing mortgage but extend the term of paying it down back to the length of the term of your initial contract. The interest rate you will receive is usually a blended rate between the one you are already paying off and the current rate offered for new clients. I explain it on the example of a five year fixed rate that means that if at the time of applying for a blended rate you have already been paying it off for two years, the blend-and-extend mortgage, will let you extend the contract back for two years and to add a new sum of money to your previous contract. At the same time, the rate of your mortgage will be lowered to a number, which falls somewhere in between your current rate and the one offered for new clients.
The other option is a blend-to-term mortgage. It is different from the previous one in that the term of your mortgage is not extended and so you do not receive additional time to pay down your debt. With the same example of a five-year fixed mortgage paid down for two years, you will receive a lower blended rate for three years left. And when the term of your mortgage expires, a new one will be opened.
To choose between two options is not easy. If you opt for a blend-and-extend rate, you will have additional years to see the interest rates dynamics. If you are sure that the rates are going to stay low for several years more and won’t rise, probably it would make sense to opt for the blend-to-term variant and start a new mortgage with a lower rate once yours expires.
When to choose a blended rate
Blended rates are a good option if you want to change the conditions of your credit and avoid penalties for breaking your mortgage contract. Since you are not breaking the contract, no penalty fees will be charged. It will also let you stay with the same lender.
Another benefit is that you will get access to the equity in your home before your current term is up.
Unfortunately, blended rates have some serious disadvantages too.
If you move, your blended rate won’t be transferred to another property. In other words, choosing a blended rate makes sense only if you lock up with the property you already have.
If you want to benefit from a blended rate you have to accurately investigate all the possible options with your lender broker in advance. Sometimes paying a prepayment fee (i.e. fee for closing your contract before the term expires, with previous payment of the rest of the sum) results to be cheaper than asking for a blended mortgage.
A blended rate does make sense if the difference between savings from a blended rate and the penalty fee is big enough. In case the current rates are much lower than the blended one, probably the best variant would be to pay off a penalty fee and start a new mortgage. The most detailed information about all calculations has your lender and the better way is to consult him once you decide to change the conditions of your debt.
To confer with your mortgage broker is also best if you decide to go with a blend and extend mortgage scenario. In this case, the blended and lower rate will stay with you only for the time of your extended term. Once it ends you will have to start a new mortgage. Unfortunately, rates are really hard to predict. However, there are some indications, upon the experts, that a stable low-interest variable rate can show a drastic rise after 2023. That means that by the end of your mortgage terms you will have to start a new one in a much more difficult finance ambiance than you currently are.
Access to the equity and type of blended rate
If you finally choose to use a blended rate with the main goal of gaining access to your equity you should also take into consideration some more aspects. For your mortgage broker, there is a significant difference between blend-and-extend rate and blend-to-term rate if you are at the same time gaining access to your equity.
If you opt for a blend-to-term rate, your lender roughly speaking will be losing his money while offering you this kind of refinancing. To cover the difference, a blend-to-term rate is usually offered if you access your equity at the same time. Consequently, you thereby increase your mortgage amount and the total sum you will owe your lender until your mortgage expires. If you do not request access to the equity and opt for a blend-to-term mortgage, the lender has the right to charge you with part of the prepayment penalty, drawn at the time of conventional refinance of a mortgage.
Gaining access to equity in your home line: more options
If your main interest at the time of applying for a blended rate is to gain access to the equity, there can be some more options that can reasonably fit you better than a blended rate.
Taking out a HELOC or a Home Equity Line of credit can be one of them. HELOC is a type of so-called collateral mortgage credit that is secured against the paid-down amount of your mortgage. It becomes accessible to you once you have more than 20% of the equity in your property. HELOC is a separate type of mortgage product, it has only interest payments, which are charged only when you use it. That means that if you don’t borrow this money, you don’t have a need to pay interest rates. As well, once you pay off the borrowed sum you will always be able to go back and get access to those funds once again.
Blend and Extend Mortgage: Summary
A blended rate is a highly underestimated and underused tool of mortgage refinancing. With blending your interest rate you will be able to save up a significant sum of money, modify conditions of your mortgage, increase the available amount of mortgage, gain access to your equity and extend the term of your credit. All this will not require you to break your mortgage contract and as a result, pay prepayment fees. Using this option you will be able to choose between extending the term of a mortgage or keeping it untouched as well as benefit from better-paying conditions.
However, it is only your lender who can provide you with the most detailed and precise information about the possibility of changing your loan conditions. It also means that there can be some additional fees that would make you rethink the idea of a blended rate. It is also very important to make all the calculations with your lender in order to make sure that a blend and extend mortgage is in fact the best option for you and that in the end, you will surely benefit from such a move.