Early Renewal Blend-and-Extend: How It Works and Pitfalls

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Blend-and-Extend: Renewing Your Mortgage Early Without a Penalty

The blend-and-extend early renewal is a mortgage strategy that generates significant interest among Canadian borrowers, particularly during periods of declining interest rates. Rather than paying a substantial penalty to break the existing contract, the borrower negotiates with their current lender for a new contract whose rate is a blend of the current contractual rate and the new market rate. The term is then extended, hence the name blend-and-extend.

How Is the Blended Rate Calculated?

The blended rate results from a time-weighted average. The basic formula combines the current rate multiplied by the number of months remaining on the term, plus the new rate multiplied by the new term duration, all divided by the total number of months. For example, a borrower with a rate of 5.75% and 18 months remaining who opts for a new 5-year term (60 months) at 4.20% would receive a blended rate of approximately 4.56%. This blended rate is higher than the market rate of 4.20% but lower than the contractual rate of 5.75%, offering an immédiate compromise.

Blend-and-extend (early renewal at blended rate): An early renewal mechanism whereby the lender combines the remaining contractual interest rate with the new rate offered to create a weighted blended rate, while extending the mortgage term. This transaction avoids the formal prepayment penalty and is done exclusively with the borrower's current lender.

Advantages of a Blend-and-Extend

No traditional prepayment penalty to pay, which can represent savings of several thousand dollars.
Administrative simplicity: no new notarial deed required in Quebec since the mortgage stays with the same lender, and no in-depth credit check in most cases.
Immédiate reduction in interest rate and monthly payments without waiting for the term to expire.
Protection against future rate increases if the current market is favourable.

Pitfalls to Watch Carefully

The blended rate is always higher than the most competitive rate available on the open market, since it incorporates a portion of your higher old rate.
The new term resets to zero, committing you to the lender for a full period (often 5 years) and delaying your next renegotiation opportunity.
The lender is not obligated to offer a blend-and-extend and may propose less advantageous terms if they know you do not wish to pay the break penalty.
Some lenders apply the penalty in disguise by adjusting the blended rate upward beyond the standard formula.

When Is a Blend-and-Extend a Commonly Preferred Option?

A blend-and-extend is generally advantageous when the prepayment penalty is very high (typically on a fixed-rate mortgage with a significant interest rate differential), when you are satisfied with your current lender, and when the gap between the blended rate and the best market rate is small. Conversely, if the penalty is modest (as is often the case for a variable-rate mortgage) or if little time remains on the term, it may be more advantageous to pay the penalty and obtain the best market rate. Your AMF-certified mortgage broker can model both scenarios to déterminé the most economical option over the entire new term.

Frequently Asked Questions

How is the blended rate calculated in a blend-and-extend?

The blended rate is a weighted average of your current rate and the new rate, weighted by the number of months remaining on the old term and the duration of the new term. For example, if you have 24 months remaining at 5.50% and extend into a new 5-year term (60 months) at 4.00%, the blended rate would be approximately (24 x 5.50% + 60 x 4.00%) / 84 = 4.43%. The exact formula varies by lender.

Is a blend-and-extend always less expensive than breaking a mortgage?

Not necessarily. A blend-and-extend avoids the break penalty, but the resulting blended rate is higher than the best market rate. It is necessary to compare the total cost of the blend-and-extend (additional interest paid over the entire new term) with the cost of breaking (penalty + fees) followed by a new loan at the best available rate. A mortgage broker can perform this comparison.

Do all lenders offer blend-and-extend?

No. The blend-and-extend is a privilege offered at the lender's discretion, not a guaranteed right. Some major Canadian banks offer it regularly, while other lenders, particularly some monoline lenders, do not. Check the terms of your mortgage contract or ask your lender directly.

Can I negotiate the rate offered in a blend-and-extend?

The new rate component of the blend-and-extend is generally negotiable, like any mortgage rate. However, the lender applies its own formula to calculate the final blended rate. Having a competing offer from another lender can give you negotiating leverage to obtain a better rate on the new portion.

Does a blend-and-extend extend my amortization period?

No, the remaining amortization stays the same. It is the term that is extended (the period between renewals). For example, if you had 22 years of remaining amortization, a 5-year blend-and-extend does not change that amortization but commits you to a new 5-year term with the same lender.