Understanding Blended Mortgages
Blend and Extend & Blend to Term
In addition to a home equity loan and home equity line of credit, another way to access your home equity and put it good use is with a blended mortgage. In this article you’ll learn about the different types of blended rate mortgages, including the Blend and Increase, the Blend and Extend, and the Blend to Term. All of these types of mortgages can be done without any penalties, and in some cases can lower your interest rate at the same time as freeing up finances for other investments. Read on to find out if a blended mortgage could work for your finance goals.
In the world of mortgage refinancing, homeowners everywhere are choosing to use their home equity to borrow more money from their bank – and for good reason! By doing so, these homeowners are accessing additional funds for things like secondary properties, consolidating debts, financing tuition payments or renovations, and lowering their interest rates.
Just like when you received your initial mortgage, qualifying for mortgage refinancing can feel just as satisfying. At Olympic Mortgages, we have seen first-hand how hundreds of our clients have been able to free up more cash flow every month while investing in their futures – all just by taking advantage of their home’s equity. In our article on home equity loans and home equity lines of credit, we highlighted two main ways you can borrow more money from the bank – via a loan or a line of credit. However, there is a third way you can refinance your mortgage, and that is through a blended mortgage.
Unlike a home equity loan or a home equity line of credit, a blended mortgage is a method of refinancing that is often used to lower the interest payments of your existing mortgage while also accessing your equity. There are no pre-payment penalties with blended mortgages, and there are no additional payments to think about every month.
Sound too good to be true? Wondering if there is a catch? There actually is no catch here. Blended mortgages are somewhat of a hidden gem – one that we at Olympic Mortgages want to make more widely known to our clients. Here’s how blended mortgages work:
What Is a Blended Mortgage?
A blended mortgage, sometimes called a blended rate mortgage, is a type of mortgage refinancing that is a change or adjustment to your existing mortgage. The term “blended mortgage” refers to the blending of your existing mortgage’s fixed interest rate with a lower interest rate being offered on a new mortgage amount. You still only have one mortgage, but you’ve agreed to blend your current interest rate with the current market’s interest rate. This is often done at the same time you’re borrowing more money from the bank.
“A blended rate occurs when two separate rates and balances are blended together proportionally to create one new rate and balance.”
If your existing mortgage rate is 4.25% and new mortgages are being offered at 2.7%, you can choose to refinance to a blended mortgage and be given a new interest rate that falls somewhere between 4.25% and 2.7%. There are blended rate online calculators that can help you determine your new interest rate, or better yet, a mortgage broker can crunch the numbers on your behalf. Whether you qualify or not for a blended mortgage rate will depend on your income and how much home equity you have accrued in your property.
In many cases, by switching to a blended mortgage, you can lower your interest rate by at least a full percent or two! There are a few options to choose from:
Blend and Increase
Blended rate mortgages can do more than just lower your interest rate overall. You can also use them to to borrow more money. If you take this route, the additional funds being borrowed are added to your existing mortgage, and the full total being borrowed is done at the blended rate. Some lenders refer to this approach to blended mortgages as a “blend and increase” because you are increasing your mortgage while blending two interest rates together.
For example, let’s say your mortgage is $250,000, your interest rate is 3%, and you would like to borrow an additional $50,000. Your lender will lend this $50,000 by tacking it onto your existing mortgage. Then they will blend the current interest rate (let’s say it is 4%), with your current interest rate. Your mortgage would become $300,000, borrowed at a blended interest rate somewhere between 3 and 4%.
In this case, you benefit by receiving extra funds from the bank while not having the interest rate of your whole mortgage leap to the higher of the two interest rates. The bank benefits as well by slightly increasing your mortgage rate a hairline fracture. All parties end up walking away feeling like they got something out of the deal.
There are two additional ways to approach a blended mortgage, you can either blend and extend, or blend to term.
Blend and Extend
If you opt for a blend and extend arrangement, you’re agreeing to start your fixed term back at the beginning. In other words, you’re hitting the reset button on your fixed term. So, in a five-year fixed term, if you choose to blend and extend your mortgage after two years, you receive the resulting blended interest rate for five more years. You’ve blended your interest rate, and you’ve extended your term.
The blend and extend option provides more stability for folks who are budget-oriented and don’t like a lot of upheaval in their lives. It can be comforting to know exactly what your interest rate is so you can better financially plan, and know that you can afford your mortgage for the next five years.
Note that you can blend and increase and blend and extend at the same time.
Blend to Term
If you go with the blend to term option, you’re agreeing to keep the current status of your fixed term as is and receive the new blended interest rate only for the remaining duration of your fixed term. If you’re two years into a five year term, you’d get the new blended interest rate only for the three years left in your term.
The blend to term option allows you to renegotiate your interest rate within a shorter amount of time. This could be beneficial if interest rates are on a downward trend. In a blend to term, when your term ends and interest rates are still low, you might even potentially get an even lower rate than what you got when you first received a blended rate.
Blending without Increasing
It’s possible to switch to a blended rate mortgage solely to benefit from a lower interest rate for a longer period of time. You don’t need to be pulling any extra money from your lender in order to receive a blended rate.
In this case, your lender might even offer you a blend and extend during some sort of promotion, especially if they can see that you have a higher interest rate than what is currently being offered new customers. This will sound like a tempting offer if there is any speculation that interest rates are going to sky-rocket around the time you’re up for renewal. The way you benefit is by getting to start your term at the beginning again locked in at a lower interest rate than what “could be” much higher in the future.
Fees Associated with Blended Mortgages
Many people choose a blended mortgage as a means of refinancing for the very reason that there is no penalty for breaking their existing mortgage terms. After all, you’re not breaking up with your mortgage – you’re just adding onto it. Depending on your lender, there might be a small administrative fee to set up a blended mortgage. Ask your mortgage broker if they can get this fee waived.
Pros and Cons of a Blended Mortgage
- No fees or penalties.
- If interest rates have dropped much lower than your current rate, blending your interest rates creates a more affordable loan.
- Freeing up capital for other investments.
- Can be a convenient way to “port your mortgage” to a new property and avoid penalties if you’re buying and selling at the same time.
- Without a crystal ball to tell us how interest rates will fluctuate in the near and far future, it can be hard to choose which type of blended mortgage is right for you.
- In some cases, it can be more financially viable to actually pay penalties and refinance using a home equity loan or HELOC, depending on your goals and what the market’s doing.
- Blended rate mortgages cannot be transferred to another property if you move. They can only be created at the time of moving. Avoid blended rate mortgages if you plan on selling your property before your term is up.
When a Blend and Increase is Best
A blend and increase is best when you need funds to make a big purchase or consolidate debt. Note that a blended and increase might not beat out home equity loans or HELOCs if you are borrowing when today’s interest rates are high and your current interest rate is low. Blending at this time might actually increase your interest by more than what a penalty to break you mortgage would be to refinance another way.
When a Blend and Extend Mortgage is Best
A blend and extend mortgage is best when you’re anticipating interest rates are going to rise and you’re coming up for renewal on your term. You can roll the dice and start your 5-year term over again with a slightly higher interest rate as a means of avoiding a much higher, brand-new interest rate.
When a Blend to Term Mortgage is Best
A blend to term mortgage should be considered only if don’t want to be locked into your blended rate for a full five years and want to keep your options open.
Compare Your Options
Before agreeing to anything with your lender, always have a mortgage professional run a comparison calculation between breaking your mortgage and taking a blended rate. Mortgage brokers can offer insights and general information regarding refinancing, including blended mortgages. Switching to a blended rate is not the right choice for everyone, so let a broker go over your options with you.
If you’re considering a blended mortgage, one of our mortgage brokers here at Olympic Mortgages in Victoria would be happy to go over your options with you to ensure you get the best deal possible. Working with a mortgage broker is absolutely free, so schedule a call with us to get started so we can get to know each other.