When it comes to refinancing your home, Canadian homeowners have a variety of mortgage options. One popular option is the blended mortgage, a hybrid financial tool that allows you to take advantage of lower interest rates while preserving the benefits of your current mortgage. In this article, we’ll dive deep into what a blended mortgage is, its types, how to calculate blended interest rates, and explore its pros and cons to help you make an informed decision.
What Is a Blended Mortgage?
A blended mortgage combines two interest rates into one, effectively blending your existing mortgage rate with a new, lower rate from additional borrowing. This refinancing tool is typically used when homeowners want to access the equity in their property or take advantage of lower market interest rates without paying steep penalties for breaking their existing mortgage.
With a blended mortgage, you avoid paying the hefty fees associated with breaking a fixed-term mortgage, which can often reach into the thousands. Instead, you “blend” the remaining interest rate on your existing loan with a new rate, producing a combined rate that’s typically lower than your original mortgage rate.
Key Features of a Blended Mortgage:
- Combines old and new interest rates
- Allows access to home equity
- Reduces or eliminates prepayment penalties
- Typically results in a lower interest rate
Types of Blended Mortgages
There are two main types of blended mortgages available in Canada:
1. Blended Rate Mortgage
In this type of mortgage, your lender combines the interest rate of your existing mortgage with the current market rate for a new mortgage. The blend is weighted based on the amounts of each mortgage. While this option often results in a lower interest rate, you are still bound by the terms and conditions of your original mortgage.
Example:
| Mortgage Component | Rate (%) | Amount ($) |
|---|---|---|
| Existing Mortgage Rate | 4.5% | $200,000 |
| New Mortgage Rate | 3.0% | $50,000 |
| Blended Mortgage Rate | 4.2% | $250,000 |
2. Blended and Extended Mortgage
This type of mortgage not only blends your existing rate with a new rate but also extends the amortization period of your mortgage. This is useful if you need to reduce your monthly payments, as the extension spreads your repayment over a longer period.
Example:
| Mortgage Component | Rate (%) | Amount ($) | Amortization Period (Years) |
|---|---|---|---|
| Existing Mortgage Rate | 4.5% | $200,000 | 15 |
| New Mortgage Rate | 3.0% | $50,000 | 25 |
| Blended Mortgage Rate | 4.1% | $250,000 | 25 |
How To Calculate Your Blended Interest Rate
Calculating your blended mortgage interest rate involves taking into account the loan amounts and interest rates of both your existing and new mortgage portions.
The formula to calculate your blended interest rate is:
Blended Rate=((Old Mortgage Amount/Total Mortgage Amount) × Old Mortgage Rate)+((New Mortgage Amount / Total Mortgage Amount) × New Mortgage Rate)
Example Calculation:
Assume you have:
- $200,000 remaining on your existing mortgage at 4.5%
- A new mortgage of $50,000 at 3.0%
The blended interest rate would be calculated as:
Blended Rate=((200,000/250,000) × 4.5%)+((50,000/ 250,000)×3.0%)
Breaking it down:
Blended Rate=0.8×4.5%+0.2×3.0%
Blended Rate=3.6%+0.6%
Blended Rate=4.2%
In this case, your blended mortgage rate is 4.2%.
Pros and Cons of a Blended Mortgage
Pros:
- Lower Interest Rates: By blending your current rate with a lower market rate, you can potentially reduce your overall interest payments.
- Avoid Prepayment Penalties: Unlike breaking your mortgage, which could come with significant penalties, a blended mortgage often allows you to refinance without these costs.
- Access to Home Equity: A blended mortgage allows you to borrow additional funds against your home’s equity, which can be useful for renovations, investments, or debt consolidation.
- Flexibility: You can adjust the terms of your mortgage to suit your financial needs, either by reducing the rate or extending the amortization period.
Cons:
- Not the Lowest Possible Rate: While you will get a lower rate than your existing mortgage, it won’t be as low as current market rates, as the blend takes into account your original, higher rate.
- Extended Amortization Can Increase Interest: Extending the amortization period can lower your monthly payments but may result in higher interest costs over time.
- Complexity: The calculation and understanding of blended mortgages can be complex, making it harder for borrowers to evaluate their true costs and benefits.
Alternatives to a Blended Mortgage
If a blended mortgage doesn’t seem right for you, there are other refinancing options available:
1. Breaking Your Mortgage
You could pay the penalty to break your mortgage and refinance entirely at a new, lower rate. However, penalties can be costly, particularly for fixed-rate mortgages.
2. Home Equity Line of Credit (HELOC)
A HELOC allows you to borrow against the equity in your home without altering your existing mortgage terms. This can offer flexibility if you need to access cash for specific projects or expenses.
3. Second Mortgage
A second mortgage allows you to take out a new loan secured by the equity in your home, while keeping your current mortgage intact. This option might result in higher overall interest costs but offers flexibility.
Frequently Asked Questions (FAQs)
1. Is a blended mortgage worth it?
A blended mortgage can be worth it if you want to access lower interest rates or home equity without paying a large prepayment penalty.
2. Can you blend a variable-rate mortgage?
Yes, some lenders allow you to blend variable-rate mortgages, although the terms and interest rate calculations may vary.
3. Do all banks in Canada offer blended mortgages?
Most major Canadian lenders offer blended mortgages, but the terms and conditions can differ. It’s essential to shop around and negotiate with your lender for the best deal.
4. How does a blended mortgage affect my credit?
Taking out a blended mortgage typically doesn’t affect your credit score negatively, as it is considered a modification to your existing loan, not a new application for credit. read more here
