A blended mortgage is a refinancing option that allows homeowners to combine their existing mortgage rate with a new one, extend the mortgage term or increase the mortgage amount without incurring hefty prepayment penalties associated with breaking a mortgage. This option is often desirable for those wanting to access lower interest rates or extend their loan terms without the typical costs of breaking a mortgage. 

Making changes to your mortgage before your early renewal period or the end of your term can result in costly prepayment penalties, which a blended mortgage can help you avoid. This guide will explore how blended mortgages work, when they can be beneficial, and what homeowners should consider before choosing one.

Key Takeaways

• Blended mortgages help you lower your interest rate or extend terms without prepayment penalties.
• Blended mortgages are a flexible refinancing option with the potential for interest savings.
• Homeowners should consider the long-term costs before opting for a blended mortgage.

What Is a Blended Mortgage?

A blended mortgage is a refinancing option that combines the interest rate of your existing mortgage with current rates to give you a new rate. With a blended rate, you won’t have to break your mortgage contract. Instead, the lender blends the current rate with the new rate, resulting in a rate falling between the two. 

Blended mortgages can also allow you to increase your mortgage term or principal, avoiding the prepayment penalties associated with breaking your mortgage. Lenders will typically only allow fixed mortgages to be blended. 

If you have a variable mortgage, you must pay the prepayment penalty to break your mortgage. However, if you have a collateral charge, you could tap into your home equity without the need to refinance, helping you avoid prepayment penalties. 

Types of Blended Mortgages

There are 3 ways to blend your mortgage, allowing you to select the solution that helps you meet your financial goals without breaking your mortgage. 

Blend and Extend

This option extends your mortgage term while blending your existing interest rate with current rates for a new lower rate. It’s often chosen by homeowners who want to reduce their rate and lengthen their mortgage term, helping to reduce interest costs or align the mortgage term with other financial goals. 

Blend to Term

This option keeps your remaining mortgage term the same but blends your existing interest rate with current rates to give you a lower rate for the remainder of your mortgage term. Blend to term is ideal for homeowners who simply want to benefit from lower rates without altering the time remaining on their mortgage term.

Blend and Increase

This option allows you to increase your principal amount, keep or extend your remaining mortgage term, and blend your existing interest rate with current rates for a new lower rate. It is ideal for homeowners wanting to tap into their home equity and take advantage of lower rates. 

How Does a Blended Mortgage Rate Work?

In a blended mortgage, the lender calculates a new interest rate based on a mix of your existing and current market rates. This new blended rate allows you to access lower interest rates without breaking your mortgage and paying prepayment penalties. Calculations are based on a weighted average when blending rates. 

For example, if you have 2 years left of your 5-year mortgage term, an existing mortgage rate of 4% and current 5-year rates are 3%, a blend and extend rate might bring your overall rate down to 3.4%. 

• Your current interest rate: 4%
• Months until the end of the term: 24 (2 years)
• Months in the blend and extend term: 60 (5 years)
• Current interest rates for a 5-year term: 3%

Step 1: Multiply your current interest rate by the months remaining on your mortgage term. 4% x 24 = 96

Step 2: Subtract the months in the new term from the months remaining on your current term. 60-24 = 36

Step 3: Multiply the current 5-year fixed rate by the difference in months from step 2. 3% x 36 = 108

Step 4: Add the results from steps 1 and 3. 96 + 108 = 204

Step 5: Divide the results from step 4 by the number of months in the new term. 204 / 60 = 3.4%

Note: The exact blended rate depends on the type of blended mortgage option you choose, the difference in rates, and the remaining time on your mortgage term.

When to Consider a Blended Mortgage

Blended mortgages can be beneficial if interest rates have dropped significantly compared to your existing mortgage rate. Blending your mortgage can help you avoid prepayment penalties while taking advantage of lower rates. 

For example, if you are 2 years into a 5-year term and have a rate of 5.95%, say you can get 4.09% on a current 5-year term. However, this would require you to break your mortgage and pay a prepayment penalty, which would likely negate any cost savings from breaking your mortgage for the lower rate. If you decide to blend and extend, you could avoid prepayment penalties and bring your rate down to around 5.21% for the next 5 years. 

You could also keep your mortgage term the same and blend your 5.95% rate with current 3-year rates. Say you can get a 3-year rate of 4.69%; you could blend your mortgage rate, keep the remaining 3 years on your mortgage term, and bring your rate down to around 5.19% for the next 3 years. 

A blended mortgage may also be ideal if you want additional funds for renovating or consolidating debts. A blend and increase would allow you to access your home’s equity without needing to refinance and pay a penalty, and you could also benefit from a lower rate. 

Blended Mortgage Pros and Cons

Pros

• Lower interest rate: You can reduce your interest rate before renewal without paying a prepayment penalty to break your mortgage.
• Access home equity: You can access additional funds for renovations or investments without breaking your mortgage and paying a prepayment penalty.
• Extended term: You can choose to adjust your mortgage term without incurring prepayment penalties, potentially protecting you from higher interest rates if they increase in the future.

Cons

• Not always the lowest rate: Blended rates are often higher than renewing or refinancing at the market rate. In some cases, switching to a new mortgage and paying the prepayment penalty could provide better cost savings.
• Potential for higher prepayment penalties: You could face higher prepayment penalties if you need to pay off a blended mortgage early if you increased your mortgage term through a blend and extend or the mortgage amount through a blend and increase. 
• May miss out on lower rates: Since it’s impossible to predict where mortgage rates will be when you come up for renewal, it’s hard to determine if you will realize cost savings over the life of your mortgage from blending your mortgage rate.  

Important Considerations Before Choosing a Blended Mortgage

Before opting for a blended mortgage, keep the following in mind:

• Long-term costs: While blended rates can save money in the short term, they may not always offer the best long-term savings.
• Break-even analysis: Determine the cost savings over time compared to paying penalties and securing a lower market rate.
• Consider alternative solutions: Depending on your mortgage strategy, other options, like a home equity line of credit (HELOC), refinance, or early renewal, may provide more long-term benefits than a blended mortgage. 
• Consult a professional: Mortgage professionals can help evaluate whether a blended mortgage aligns with your financial goals and compare options across lenders.

Frequently Asked Questions

Final Thoughts 

Blended mortgages provide a valuable refinancing option for homeowners who want to benefit from lower interest rates, extend their mortgage term, or access equity without incurring prepayment penalties. By blending your existing rate with current rates, you can save on interest costs without breaking your mortgage. However, weigh the long-term savings and determine if it aligns with your financial goals. 

Consult our mortgage professionals today to understand your blended mortgage options or to find the best mortgage for your needs.