In the ever-changing environment of real estate financing, new solutions emerge to address the different needs of consumers. The blended mortgage is one such financial instrument that has become more well-known recently. A blended mortgage gives borrowers a special and adaptable solution to deal with the constantly shifting tide of interest rates by combining the finest features of fixed-rate and variable-rate mortgages.

This thorough guide seeks to demystify the idea of blended mortgages by giving existing and potential homeowners an advanced grasp of how this type of blended mortgages product works and how to best utilize it to maximize financial results.

What is a Blended Mortgage?

A blended mortgage is a type of financial instrument that gives you the following options:

• Adjust your loan interest rate (Blend)
• Renew your mortgage’s term (Extend)
• Utilize the equity in your house to obtain further loans

To avoid paying penalties for breaking your mortgage, you can choose to “blend and extend” your loan before the date of renewal. Another blended mortgage option is called “blend to term”. This enables you to adjust your mortgage rate without having to extend its duration.

Types of Blended Mortgages

Blended mortgages come in two forms: the Blend and Extend Mortgage, and the Blend to Term Mortgage.

• Blend- and- Extend Mortgages: This type of mortgage allows you to capitalize on the prevailing low mortgage rates and renew your mortgage instantly. It eliminates the need to wait until the end of your mortgage term for renewal and avoids any penalties for early refinancing. In this scenario, your old interest rate is combined with a new rate offered by your lender, resulting in a blended mortgage rate that falls between the two. Consequently, your mortgage is renewed for another term.

However, some lenders may still impose a prepayment penalty, which can be incorporated into your blended mortgage rate, thereby increasing it, or it can be charged upfront.

• Blend to Term: In this variant, your old mortgage rate is blended with a new one, but without extending or renewing your mortgage for another term. Instead, your new blended mortgage rate applies only for the remainder of your current term. Upon the end of your term, you have the usual options to renew, refinance, or switch lenders.

For instance, if you have 2 years left until your renewal date for a 5-year mortgage, then a blend to term will provide you with a blended rate that will be applicable for only those 2 years.

Formula for Calculating the Blended Mortgages

Blend and extend mortgage

To determine the blended mortgage rate for a Blend and Extend mortgage, you can follow these steps using the given formulas:

1. Subtract the remaining term of the mortgage from the original term and divide the result by the original term. This gives you the value ‘a’:
   a=Original Mortgage Term − Mortgage Term Remaining​
   
2. Subtract ‘a’ from 1 to get the value ‘b’:
   b=1−a
   
3. Multiply ‘a’ by the new mortgage rate and ‘b’ by the old mortgage rate. The sum of these two products gives you the blended mortgage rate: Blended Mortgage Rate= a × New Mortgage Rate + b × Old Mortgage Rate

Blend to term mortgage

To compute the blended mortgage rate for a Blend to Term mortgage, adhere to the following steps using the provided formulas:

1. Calculate ‘a’ by subtracting the remaining term of the mortgage from the original term and dividing the result by the original term:
   a = Original Mortgage Term− Mortgage Term Remaining
   
2. Determine ‘b’ by subtracting ‘a’ from 1:
   b=1−a
   
3. Finally, calculate the blended mortgage rate by adding the product of ‘a’ and the old mortgage rate to the product of ‘b’ and the new mortgage rate: Blended Mortgage Rate= a × Old Mortgage Rate + b × New Mortgage Rate

Blend-and-Extend VS. Blend-to-Term Mortgages

While many financial institutions offer blended mortgages, they are not typically advertised. If you inquire with your lender, they would provide information about the two types of blended mortgages and how they can be financially beneficial.

Blend-and-Extend Mortgage

• Interest Rate Combination: Involves blending your existing interest rate with the current market rate.
• Term Extension: Simultaneously extends the mortgage term, allowing for a longer duration of the blended rate.
• Example: If you have a fixed-rate mortgage at 3.5% with three years left on a five-year term, blending and extending could result in a rate around 2.79%. The term would be extended by two years, returning to a full five-year term.
• Stability Emphasis: Suited for those who prioritize stability in their mortgage payments over an extended period.

Blend-to-Term Mortgage

• Interest Rate Combination: Blends your existing interest rate with the current market rate.
• Unchanged Term: Unlike the blend-and-extend option, the term remains unchanged. The blended rate is applied only for the remaining duration of the current term.
• Example: If you have two years left on your term, a blend-to-term mortgage would apply the new blended rate for those two years. At the term’s end, you would need to secure a new mortgage based on prevailing rates.
• Flexibility Emphasis: Ideal for those anticipating further rate reductions and seeking flexibility to secure the best rates when the current term concludes.

Determining Superiority

• Individual Circumstances: The choice between blend-and-extend and blend-to-term depends on individual circumstances and financial goals.
• Stability vs. Flexibility: If stability in mortgage payments is a priority, a blend-and-extend mortgage is more suitable. On the other hand, if the borrower anticipates potential rate reductions and desires flexibility, a blend-to-term mortgage offers the opportunity to reassess rates at the end of each term.
• Market Conditions: Consideration of prevailing market conditions is crucial. Assess whether current rates are favorable for a blend-and-extend approach or if a blend-to-term strategy aligns better with anticipated market trends.
• Risk Tolerance: Evaluate personal risk tolerance and comfort with interest rate fluctuations. Those seeking a more predictable mortgage payment may lean towards blend-and-extend, while those comfortable with potential market changes may opt for blend-to-term for greater flexibility.

Advantages and Disadvantages of a Blended Mortgages

Before deciding on a blended mortgage, it’s crucial to weigh its benefits and drawbacks.

Benefits of a Blended Mortgage

1. No Penalties: As you’re not terminating your mortgage prematurely, there are no prepayment charges.
2. Reduced Interest Rates: This option allows you to benefit from mortgage rates that are lower than your current rate.
3. Access to Equity: You can tap into your home’s equity, which can be utilized for various purposes.

Drawbacks of a Blended Mortgage

1. Limited Flexibility: A blended mortgage cannot be transferred to a new property if you decide to move.
2. Less cost-effective: Depending on the terms of your mortgage contract, it might be more cost-effective to pay the prepayment fee and secure a new mortgage.
3. Uncertainty Over the Best Option: Given the fluctuating nature of interest rates, it’s impossible to definitively state whether a blend-and-extend or blend-to-term mortgage would be more cost-effective.

Exploring Alternatives to a Blend-and-Extend Mortgage

When contemplating alternatives to a blended mortgage, it’s essential to understand your motive for seeking a new mortgage. Typically, individuals aim to secure a lower mortgage rate or refinance their existing mortgage. Identifying your objectives can simplify the selection process.

1. Terminating Your Current Mortgage: If there’s been a significant drop in interest rates, it might be beneficial to terminate your existing mortgage. The termination fee is stipulated in your contract and is typically based on either three months’ interest or the interest rate differential, contingent on whether your mortgage is open or closed. If the savings from securing a new mortgage outweigh the termination fee, it could be advantageous to switch.
2. Securing a Home Equity Line of Credit (HELOC): If your objective is to access equity, obtaining a HELOC might be a more straightforward solution. A HELOC is a revolving credit line secured against your home, allowing you to access up to 65% of your property’s value. Although there may be administrative, legal, and appraisal fees involved, once established, you’re only required to make interest payments on the borrowed funds.

While a blend-and-extend mortgage is a popular choice when interest rates are declining, if rates are increasing, it might be worthwhile to explore other mortgage options.

Summing Up

For homeowners who wish to take advantage of lower rates or use their home equity for other purposes, a blended mortgage can be a practical and flexible alternative. Nevertheless, there are certain disadvantages to a blended mortgage, including the inability to port or transfer it to another home and the potential for higher costs than a traditional mortgage. As a result, you should speak with your mortgage expert and weigh your options before choosing a mixed mortgage.