Blend-and-extend explained: is it ever worth it?

A mortgage renewal can feel like a fresh start, a chance to lock in a new rate and adjust your payments. But what if interest rates drop significantly before your renewal date? Or perhaps you need to access some equity for a renovation, but you're still a few years out from your term ending. That's where a "blend and extend" option might come into play. It's a strategy that can sound appealing on the surface, but like many financial decisions, the devil is in the details. As your mortgage broker, I'm here to help you understand if blending and extending is truly a good deal for your specific situation.

What Exactly is a Blend and Extend?

In simple terms, a blend and extend allows you to combine your current mortgage interest rate with a new, typically lower, interest rate offered by your existing lender. This creates a "blended" rate. At the same time, you'll extend the remaining term of your mortgage. So, instead of waiting until your renewal date, you're essentially breaking your current mortgage contract early to enter into a new one with a different rate and a new term length.

This can be particularly attractive if market rates have fallen considerably since you first took out your mortgage. You get to benefit from some of those lower rates sooner rather than later, without going through the full process of switching lenders. It can also be a way to avoid a hefty penalty for breaking your mortgage entirely, as your current lender might waive or reduce it as part of the blend and extend offer.

Why Would My Lender Offer This?

It's important to remember that lenders are businesses, and they offer blend and extend options for strategic reasons. Primarily, it's a retention tool. If you're considering breaking your mortgage to go to another lender for a better rate, offering a blend and extend can keep you as their client. They'd rather keep you, even at a slightly lower rate, than lose your business entirely.

It also allows them to lock you into a new term, which provides them with predictable income for a longer period. While it might seem like they're doing you a favour, they're also securing your business for another few years. This isn't necessarily a bad thing, but it's crucial to understand their motivation to properly evaluate the offer.

When Might a Blend and Extend Make Sense?

While not always the best option, there are specific scenarios where a blend and extend can be genuinely beneficial:

• Significantly Lower Market Rates: If current mortgage rates are substantially lower than your existing rate, a blend and extend could allow you to access some of those savings sooner. The blended rate will be somewhere between your old high rate and the new low rate, providing immediate relief on your payments or allowing you to pay down your principal faster.
• Avoiding a Large Penalty: If you need to break your mortgage mid-term (e.g., to refinance for renovations, consolidate debt, or purchase a new home) and the penalty for doing so is very high, your current lender might offer a blend and extend as an alternative. This could reduce or waive the penalty, saving you a considerable sum upfront.
• Accessing Equity: Sometimes, a blend and extend can be combined with a refinance to access equity in your home. This can be a more streamlined process with your current lender than going through a full switch to a new institution.
• Simplifying Your Finances: For some, the convenience of staying with their current lender and avoiding the paperwork and stress of a new application process is a significant factor.

The Downsides and What to Watch Out For

Despite the potential benefits, a blend and extend isn't without its drawbacks. It's crucial to look beyond the initial appeal and consider the long-term implications:

• The Blended Rate Might Not Be the Best: While the blended rate will be lower than your current rate, it will almost certainly be higher than the best rates available in the market for a new mortgage. Your current lender has little incentive to offer you their absolute lowest rates if they know you're already locked in with them.
• Extending Your Term: You'll be extending the length of your mortgage, which means you'll be paying interest for a longer period. Even if your monthly payments are lower, the total interest paid over the life of the loan could increase.
• Loss of Flexibility: By blending and extending, you're committing to your current lender for a new term. This might limit your options if even better rates become available later, or if your financial circumstances change and another lender's products become more suitable.
• Hidden Costs: Always ask about any administrative fees, appraisal costs, or other charges associated with the blend and extend. While often less than a full refinance, they can still add up.
• Prepayment Penalties Reset: When you blend and extend, you're essentially starting a new mortgage contract. This means any prepayment penalty calculations will typically reset, potentially making it more expensive to break your mortgage again in the future.

Alternatives to Consider

Before jumping into a blend and extend, always explore your other options:

1. Do nothing: If your renewal is only a year or two away, and you don't desperately need to access equity, waiting might be the best strategy. You can then shop around for the absolute best rates when your term is up.
2. Refinance with a new lender: This involves breaking your current mortgage, paying the penalty, and getting a completely new mortgage with a different lender. While the penalty can be substantial (often 3 months' interest or the interest rate differential, whichever is greater), the new, lower rate from a competitive lender might save you more in the long run. This is especially true if your current lender's rates are significantly higher than market rates.
3. Home Equity Line of Credit (HELOC): If you only need to access a smaller amount of equity for a short period, a HELOC might be a more flexible option than refinancing your entire mortgage.

My Recommendation

As your mortgage broker, my advice is always to explore all your options. Don't just accept the first offer your current lender presents. While a blend and extend can be a convenient solution in specific situations, it's rarely the most competitive rate you can get.

I can help you analyze the numbers, compare the blended rate to the best market rates available, and calculate the true cost of breaking your mortgage versus staying put or blending and extending. I'll look at the total interest paid over the life of the loan, not just the monthly payment, to ensure you're making the most financially sound decision for your future.

FAQ

Q: Will a blend and extend affect my credit score? A: Generally, a blend and extend with your existing lender is less likely to have a significant impact on your credit score than applying for a brand new mortgage with a different institution. However, your lender may still perform a soft credit check, and any changes to your mortgage terms are reported to credit bureaus.

Q: Can I blend and extend if I have bad credit? A: While it's typically easier to blend and extend with your current lender than to qualify for a new mortgage with a different institution if you have credit issues, your lender will still assess your financial situation. If your credit has significantly worsened, they may decline the blend and extend or offer less favourable terms.

Q: Is the penalty for breaking my mortgage always the same? A: No, the penalty can vary significantly. For fixed-rate mortgages, it's usually the greater of three months' interest or the Interest Rate Differential (IRD). For variable-rate mortgages, it's typically three months' interest. The IRD can be a very large sum, especially if rates have dropped considerably since you took out your mortgage. Always ask your lender for a precise penalty calculation before making any decisions.

Ready to explore your mortgage options and see if a blend and extend, or another strategy, is right for you? Take two minutes to complete my free free intake for me to review form at free intake for me to review, or give me a call directly at 778-222-7109. Let's make sure you're getting the best deal possible.

Related mortgage resources

• Explore my mortgage renewal options to review your renewal before signing.
• Explore my refinancing options to compare ways to restructure your mortgage.
• Read Surviving Mortgage Renewal Shock in Vancouver: Smart Refinancing Strategies for a related BC mortgage perspective.