Blend-and-Extend: Avoid Mortgage Penalties in Canada

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Blend-and-Extend: Combining Rates to Avoid the Penalty

Blend-and-extend is one of the least known strategies for avoiding or reducing the prepayment penalty on a mortgage. Instead of breaking your mortgage and taking out a new one, you negotiate with your current lender a rate modification and a term extension. The result is a blended rate, falling between your old rate and the current market rate, with no break penalty.

The Blended Rate Mechanism

The principle is based on a weighted average. The lender calculates a new rate taking into account your current contract rate, the rate it offers for the chosen new term, and the time remaining on your current term relative to the new term duration. The more time remaining at the old rate, the closer the blended rate will be to your old rate. Conversely, if your term is nearing its end, the blended rate will approach the current rate.

Blend-and-extend: A mortgage modification offered by the current lender that combines the existing contractual rate with the current rate to obtain a blended rate, while extending the loan term. This strategy avoids the prepayment penalty since the mortgage is not officially broken.

Concrete Calculation Example

Consider an example: you have a mortgage with a $300,000 balance at a fixed rate of 5.75% with 2 years remaining on a 5-year term. The lender currently offers 4.50% for a new 5-year term. The simplified blended rate calculation would be: (2 years x 5.75% + 3 years x 4.50%) / 5 years = 5.00%. You go from 5.75% to 5.00%, with no penalty. On a $300,000 balance, this represents savings of approximately $2,250 per year in interest, or $4,500 over the 2 remaining years of the old term. Compare this gain with the penalty you would have paid to break the mortgage.

Advantages and Limitations of Blend-and-Extend

No prepayment penalty: since the mortgage is not broken, the three months' interest or interest rate differential (IRD) penalty does not apply.
Reduced fees: no appraisal fees, minimal legal fees (amendment to the existing contract rather than a new mortgage agreement).
Fast process: the modification can often be completed in a few days, unlike a full refinance which takes 4 to 6 weeks.
Limited to current lender: you cannot do a blend-and-extend with another lender, which limits your negotiating power.
Intermediate rate: the blended rate will always be higher than the current market rate, which can represent a significant opportunity cost over a 5-year term.
Term extension: you commit to a new full term, which extends the period during which you are bound to the lender.

When to Choose Blend-and-Extend in Quebec

Blend-and-extend is particularly advantageous in the following situations: your prepayment penalty is high (typically with the IRD calculation at major banks), the spread between your old rate and the current rate is moderate (less than 1.5%), and you do not need additional funds. The strategy is also relevant when you want to secure a lower rate quickly without the delays of a refinance. In Quebec, the amendment to the mortgage contract can be prepared by the lender without necessarily involving a notary for minor modifications, though some lenders require a notarized deed for rate and term changes. Consult an AMF-certified mortgage broker for a complete analysis of your situation.

Frequently Asked Questions

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

The blended rate is a weighted average between your current rate and the new rate, weighted by the time remaining on the original term and the duration of the new term. For example, if you have 2 years remaining at 5.50% and the lender offers a 5-year term at 4.50%, the blended rate would be approximately (2 x 5.50% + 3 x 4.50%) / 5 = 4.90%. The exact formula varies by lender.

Are there fees for a blend-and-extend?

Fees are generally much lower than for a full refinance. Since the mortgage is not broken, there is no prepayment penalty. Fees may include administrative charges from the lender ($0 to $500), and in some cases, minimal legal fees if a notarized amendment is required in Quebec. There is generally no appraisal fee.

Can I do a blend-and-extend to increase my mortgage amount?

Generally no, or only in a very limited way. Blend-and-extend is designed to modify the rate and extend the term, not to increase the loan amount. If you need additional funds, you will likely need a full refinance or a supplemental second-ranking loan. Some lenders do offer a blend-and-increase with a limited additional amount.

Is blend-and-extend always preferable to breaking the mortgage?

No. If current rates are significantly lower than your resulting blended rate, it may be more beneficial to pay the penalty and get a new loan at the current rate. Your AMF-certified broker must compare both scenarios: the total cost of the blend-and-extend over the new term versus the total cost of the penalty plus a new loan at a potentially lower rate.

Can I do a blend-and-extend with a different lender?

No. Blend-and-extend is an internal modification offered by your current lender. Switching lenders requires breaking your mortgage and taking out a new one, which triggers the prepayment penalty. This is why the strategy is sometimes seen as a client retention tool for lenders.