Blend and Extend Mortgage in Canada: How the Blended Rate Works

A blend-and-extend lets you move to a lower rate before your term ends without paying a prepayment penalty. Your lender extends the mortgage into a new term and blends your old rate with the new term’s rate. This page explains how the blended rate is worked out and how to compare it with breaking the mortgage. It is part of the refinancing and home equity hub.

How it works

The Financial Consumer Agency of Canada (FCAC) describes blend-and-extend as an early renewal option (FCAC: Breaking your mortgage contract):

• Lenders may allow you to extend the length of your mortgage before the end of your term.
• If you choose this option, you don’t pay a prepayment penalty, but you may have to pay administrative fees.
• The lender blends your old interest rate and the new term’s interest rate. Lenders call it blend-and-extend, or a blended mortgage.
• Your lender must tell you how it calculates your new interest rate.

The FCAC also notes that you’ll usually pay fees when you set up a new mortgage, including with a blend-and-extend, and that lenders may be willing to pay some or all of them.

How the blended rate is calculated

The FCAC gives a simplified method “for illustration purposes”: each rate is weighted by the number of months it covers in the new term.

Blended rate = (current rate × months left in current term + new rate × (months in new term − months left)) ÷ months in new term

Here is the FCAC’s own example, recomputed from its inputs.

The FCAC’s page states the same result: a blended rate of 4.6% for 60 months. In effect, you keep paying for the months you had already committed to at your old rate, spread across the new term. Your lender’s own method may differ from this simplified one, which is why the FCAC says the lender must tell you how it calculates the rate.

Blend-and-extend compared with breaking

The trade-off is cash now against a higher rate later. Breaking gets you the full new rate but costs the prepayment penalty and fees; blending avoids the penalty but leaves you at the blended rate for the whole new term. Using the FCAC example, both at the lender’s five-year rate and with the 22 years of amortization left:

The blend costs $64.18 a month more than the new rate, or $3,851 over the 60-month term. The higher blended rate also leaves a higher balance at the end of the term: $170,307 against $168,491 at the new rate, $1,815 more. Together that is about $5,666 more interest over the new term with the blend. In this example, breaking costs less over the new term only if the penalty plus fees come to less than about that amount, with the same balance and amortization in both cases; see the break-even calculation for the method, and how mortgage penalties are calculated to estimate the penalty side.

Things to weigh

The FCAC lists these pros and cons of breaking your contract, whether to take a new mortgage or to blend-and-extend:

Two points specific to a blend:

• You stay with your current lender. The new-rate part of the blend is your lender’s rate for the new term, so the result is worth comparing with what other lenders offer, net of the penalty to leave.
• You commit to a new term. The extension replaces the date when you could otherwise have renewed or switched lenders without a penalty.

Keeping your payment unchanged after the rate drops sends the difference to principal; the FCAC mentions this as one way to pay off a mortgage faster (FCAC: Paying off your mortgage faster).

Related pages

• Should I break my mortgage for a lower rate?
• Mortgage break-even calculation
• How mortgage penalties are calculated
• Blended mortgage
• Early mortgage renewal
• Refinancing and home equity hub