Mortgage Contract Modification | Amendment and Blend-and-Extend

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Modifying a Mortgage Contract: Options and Considerations

It frequently happens that a borrower's circumstances change during the term, requiring a mortgage contract modification. Reasons may include a drop in interest rates, a need for additional funds, a change in financial situation or a renovation project. The Civil Code of Quebec provides that any contractual modification requires the mutual consent of the parties.

The Mortgage Amendment

An amendment is the legal mechanism for modifying an existing contract. In mortgage matters, it may address the interest rate, term, amount or other conditions. If the modification increases the mortgage amount or extends its duration, a new notarial act is generally required and must be published at the Land Register. Associated legal fees vary depending on the nature and scope of the modification.

Blend-and-Extend

Blend-and-extend is a popular modification strategy in Canada. It involves combining the existing interest rate with a new rate for an extended term. The calculation produces a blended rate (weighted average) that applies to the new term. The main advantage is avoiding the prepayment penalty since the loan is not repaid but extended.

Role of the Mortgage Broker

The AMF-certified mortgage broker must objectively analyze all modification options available to the client. This includes blend-and-extend with the current lender, refinancing with the same lender or a competitor, and transferring (switching) the mortgage. The broker must present a quantified comparison of the total costs of each option, including legal fees, potential penalties and the rate difference over the term's duration.

Frequently Asked Questions

What is a mortgage amendment?

An amendment is a legal act that modifies the terms of an existing mortgage contract without replacing it. It can change the interest rate, extend the term, increase the amount or modify other conditions. The amendment requires the consent of both parties and must often be formalized by notarial act.

How does blend-and-extend work?

Blend-and-extend involves blending your current rate with the rate offered for a new term and extending the term. The resulting rate is a weighted average. For example, if you have 2 years remaining at 4% and the new 5-year rate is 3%, the blended rate will be calculated taking into account the balance and respective durations.

Does blend-and-extend avoid the penalty?

Yes, the main advantage of blend-and-extend is avoiding the prepayment penalty. By staying with the same lender and extending the term, the borrower does not have to repay the existing loan. However, the blended rate obtained may be higher than the most competitive rate available on the market.

Should the broker compare blend-and-extend to refinancing?

Absolutely. The broker must calculate the net cost of the blend-and-extend (blended rate over the new term) and compare it to the cost of refinancing (best available rate minus the penalty). Sometimes, paying the penalty and getting a better rate is more advantageous in the long run than blend-and-extend.