Blends, Extends and Early Renewals

Early Renewal

Some financial institutions will allow you to early renew simply by paying a small administration fee. This is your best option if you don't want to miss out on current low interest rates and intend to average down to a lower monthly payment.

Assume your mortgage is at 10% for the next 2 ½ years and that current interest rates for a new five year term are 5%. If you were to early renew to a new five year term you would be extending your mortgage term back out to five years from the remaining 2 ½ years. Practically, you would still suffer the current rate of 10% for the first 30 months but thereafter you would enjoy 5% for the following 30 months. Rather than actually charge you this way your financial institution will "blend" the two interest rates into an average rate for the entire 60month term. Given that you will have half of the term at 10% interest rates and the other half of the term at 5% interest rates the average rate will be 7.5 %.

Canada Mortgage Manager

If your mortgage is $100,000 at 7.5% interest with 22 ½ year remaining until it is fully paid off, your new "blended" payment would be $761. At 10% your current payment is $894 so you are lowering your payments by $133.

This is a great way to lock in current interest rates even if you are not up for renewal for several years. It's a no lose situation. If rates are higher in 2 ½ years you will have made a great decision. If they stay the same you will have paid the price of five year rates for the added 30 month term, usually a small price for the increased peace of mind. If rates are lower than your blend, early renew again.

Check with your financial institution to determine your options

Increase and Blend

If you've paid down your mortgage and / or your home value has increased, and you would like to release some of the equity, it may be possible to increase and blend. A blend allows you to increase your existing mortgage. The new funds you will receive will be at current prevailing mortgage rates. This rate will be blended with your current rate proportionally.

Assume your home is currently valued at $200,000 and your mortgage is $100,000 at a 6.5% fixed interest rate with 3 years remaining until renewal. You want to take out $25,000 of your equity to finance some long overdue home renovations. Current interest rates for a 3 year term are now at 7.5%. As such, your lender will be able to offer you the $25,000 mortgage increase you need at 7.5%

Once you have qualified for the increase you will be left with a new mortgage of $125,000 at a new blended interest rate. Given that you have $100,000 or 80% of the new mortgage at 6.5%, and $25,000 or 20% of the new mortgage at 7.5%, you new blended interest rate will be 6.7%.

In many cases the mortgage lender will round this rate up to 6.75%, the nearest 1/8th or 1/4 of a percent. Use the Canada Mortgage Manager to calculate your own blend.

Blend and Extend

At the same time that you decide to increase your mortgage you may also be thinking of early renewing to a five year term. This is known as a blend and extend. If interest rates for a five year term are currently at 7.75%, and you now have a blended mortgage of $125,000 at 6.7% for a term of 3 years, the last step is to extend the mortgage to a new 5 year (60 month) term.

Your new extended mortgage of $125,000 will have an interest rate of 7.12% for a new term of 5 years. This is the same calculation as the early renewal above. The mortgage is at 6.7% for the first 36 months and 7.75% for the remaining 24 months resulting in an average rate for the 60 month term of 7.12%

Last changed: Feb 13 2012 at 8:10 PM