Blended Mortgage In Canada; Plain And Simple

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Overview of Blended Mortgage In Canada

Blended mortgage is another way of refinancing your mortgage. The essence of why people choose to use this refinance method is to avoid paying prepayment penalties for breaking their mortgage contract early.

Mortgage refinancing allows you to access or cash out on the equity you have in your home. You will often be penalized if you choose to refinance your mortgage before the end of your mortgage term. A blended mortgage allows you to refinance your mortgage without necessarily breaking the term.

We cover what a blended mortgage is, how it works, why it is worth considering and why it is not. We also look at other ways you can choose to refinance your mortgage.

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What Is A Blended Mortgage?

A blended mortgage program allows you to refinance your mortgage early without paying a prepayment penalty. Your mortgage rate under this program is a blend of your current mortgage rate and the lender’s current rate for the term you selected.

The blended mortgage solution is valuable and worth utilizing in a low-interest-rate environment to save yourself from paying a high-interest rate when mortgage rates have gone down.

Interest rate blending is the main characteristic of a blended mortgage. It is why it sometimes is referred to as a blended rate mortgage.

The blended mortgage option does not apply if you choose to switch lenders. Also, it is not advantageous in a rising interest rate environment.

How A Blended Mortgage Works

The essence of a blended mortgage is two-fold. The first is avoiding the prepayment penalty, and the second is enjoying a low mortgage interest rate.

Let’s assume the rate on your existing mortgage is 3.45 percent.

The lender will waive the penalty if you blend your current rate with the current mortgage rate, which is 2.35 percent.

Here’s a relatively simple, straightforward calculation:

[3.45% (existing rate) + 2.35% (lender’s current rate)]/ 2 = 2.90%

This means instead of the low market rate of 2.35 percent. Your new mortgage rate will be 2.90 percent, a blend of the two rates. Blending the rates is you don’t have to pay the prepayment penalty for breaking your mortgage early.

The 2.90 percent rate is still lower than your existing 3.45 percent rate.

However, there is more to a blended rate mortgage calculation than this simple average calculation. The above analysis is just a skeleton to illustrate how it works. The new mortgage term and new mortgage loan will have to be factored in to derive the actual rate you will get.

The actual blended mortgage rate is complex, as illustrated above, but the overall logic is the same. Blending two rates to generate a new midway rate.

That brings us to the two general types of blended mortgages – Blend and Extend, Blend and Increase.

Types Of Blended Mortgages

There are two ways to approach a blended mortgage. It can be either blend-to-term or blend-and-extend. Let’s discuss each one.

Blend-and-Extend

Blend-and-extend is the most common blended mortgage type. The outcome of a blend-and-extend mortgage is a new mortgage rate and a fresh (longer) term.

Mortgage terms are the length of time you want to be in a mortgage contract. Examples of standard mortgage terms are five years, two years or four years.

For example, let’s say you are currently two years into your five-year mortgage with an interest rate of 4.32 percent, and your lender is now offering a rate of 2.32 percent to new borrowers; you’ll receive the resulting blend rate, which falls between 2.32 percent and 4.32 percent, with a reset term of five years.

This refinanced mortgage option is suitable for budget-oriented individuals looking for a stable financial lifestyle.

Blend-to-Term

Blend-to-term allows you to blend your mortgage rate without increasing your mortgage term.

For example, two years into a five-year term, you are three years to mature your existing mortgage contract. Using blend-to-term, you will blend your mortgage rate with the lender’s current three-year mortgage rate. Your remaining mortgage term will not be increased. It will stay at three years.

As explained above, with a blend-to-term, your new mortgage rate is still a blend of the current rate and the lender’s current offered rate, but there is no time added to your current mortgage term. If you have three years left on your mortgage, the new blended rate will be only for the three years you have left.

Lenders are more likely to offer this mortgage refinance to increase your existing loan balance. That is, you are blending your mortgage to increase your mortgage loan. Otherwise, your lender may charge you a penalty to compensate for the loss for the new lower rate you will get.

Pros And Cons Of A Blended Mortgage

Pros Of A Blended Mortgage

No Penalty Or Fees: You won’t be charged a prepayment penalty or fees since you are not breaking your mortgage.
Lower New Rate: Your new interest rate will be between these two rates since you combine a higher and a lower rate. Therefore, mortgage blending allows you to enjoy a lower rate than your current high rate.
Access To Equity: Mortgage blending is a way to refinance. When you choose to blend and increase, you can access the equity in your home to finance much-needed expenses.

Cons Of A Blended Mortgage

Can Be Expensive: It may be cheaper to pay the prepayment penalty and get an even lower mortgage rate.
Long Run Possibility Of A Prepayment Penalty: If you choose to blend and extend your mortgage, you get stuck to a longer-term mortgage and may be prone to future prepayment penalties if you sell the house shortly.

Less Long-Term Flexibility: Blend and extend are less flexible as you have limited options to add to your mortgage than going for a brand-new mortgage loan. Also, a blended mortgage is only applicable if you refinance your mortgage with the existing lender. You can’t switch lenders for a blended mortgage.

Alternatives To A Blended Mortgage

There are other methods to refinance your mortgage than a blended rate. An example is a straight mortgage refinance, home equity loan, or home equity line of credit. See the details below.

Break Your Current Mortgage

It may be worth breaking your mortgage and going for a straight mortgage refinance. You will be penalized if you choose to break your mortgage term early.

However, if rates have fallen considerably since you last got your mortgage, the savings from the new mortgage might outpace the savings of the prepayment penalty with a blended mortgage.

You have to research to make sure you qualify for the low mortgage. Your situation might have changed since you last approved the mortgage.

Get A Home Equity Line Of Credit (HELOC)

Home Equity Line Of Credit (HELOC) is another option available to you if you choose to access the equity in your property. HELOC operates like your personal Line of Credit, but it is secured against your house and comes with a lower mortgage rate.

HELOC allows you to access up to 65 percent of your home’s value. You only are required to make the interest payment, which may be lower than paying the principal and interest at once.

Get A Home Equity Loan

Home equity loans (also called a second mortgage) allow homeowners to borrow money against the equity in their homes. For any loan, you need collateral.

Likewise, for a home equity loan, your home equity is the collateral that secures the loan. Consequently, you may lose your home if you default on your home equity loan. In addition, if real estate values go down, you may owe more than your home’s value.

Since your asset guarantees the loan, you can borrow a large amount at a low-interest rate. However, the interest rate is less than unsecured loans, such as credit cards or personal lines of credit.

Final Thought

A blended mortgage might be a good option, but it does come without disadvantages. Before deciding to blend your mortgage rates, assess your overall mortgage needs and your current and future financial needs.

You can still talk with one of approvU’s mortgage experts to help evaluate your situation for free and help you understand your options. Then you can have a purpose for the blended mortgage.

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