Here we will look at:
- How an Increase and Blend mortgage works
- How the Increase and Blend applies to a Mortgage Refinance
- What an Increase, Blend, and Extend Mortgage is.
- How to know if it’s better to break and restart the mortgage? Or to increase and blend?
How an Increase and Blend Mortgage Works
To explain using an example, let’s say your current mortgage is $200,000 at a rate of 3%.
If you move and require an additional $200,000 or mortgage (for a total of $400,000 mortgage) and new rates are 2%, then your average blended mortgage rate on the new $400,000 mortgage could be 2.5%.
In the example above, because you are perfectly doubling the mortgage amount, we can average the rate a perfect 50%/ 50% (or 2% rate on $200,0000 + 3% rate on $200,000 = 2.5% rate on $400,000).
If the example was different, and we instead needed $100,000 of additional mortgage (instead of an additional $200,000) then the weighting of the new blended rate would be less for the new mortgage amount. Because there is less mortgage that we are blending with the current mortgage balancing owing.
Increase and Blend on a Mortgage Refinance
Or, if you are refinancing – it’s the same idea. If you are NOT moving but require $200,000 in extra mortgage for your renovations, debt consolidation, or investment (or all of the above together) then the calculation idea is the same for a blended mortgage. The main point is that you are avoiding the penalty to BREAK the mortgage.
So this is the idea of an increase and blend – you are literally increasing the mortgage and blending the rate. The calculation can change from lender to lender, and situation to situation. But it could save you thousands of dollars – especially if you are facing either a higher rate or a high penalty.
There is one variation to their blended mortgage called the increase, blend, and extend.
What is an Increase and Blend and Extend Mortgage?
With an increase, blend, and extend mortgage you are literally extending the mortgage amortization or time that you take to prepay the mortgage. So not only do you avoid the penalty and blend the interest rate, but you would also lower your payment by extending the amortization, or time that you elect to repay the entire mortgage.
It’s worth noting that if you elect to extend the mortgage amortization to reduce the payment, that you would likely still have prepayment privileges. So the idea behind an increase, blend and extended mortgage is that you may be able to take as much as 30 years with the new mortgage, or as little as 5 years – it’s up to you.
Having the option of extending the mortgage amortization on a blend can be a great cash flow management tool.
The blend mortgage is a very important option to consider if you are moving/ porting or refinancing you mortgage and we are happy to help provide calculations and guidance specific to your situation to help you make the best decision. In most cases, there is no cost for our service and there is never any obligation to proceed with our options or quotes.
How to know if it’s better to break and restart the mortgage? Or to increase and blend?
Whether or not pursuing a blended mortgage strategy makes sense or not comes down to some fairly straight forward math. There does not need to be much, if any, guesswork involved.
The two main reasons to blend a mortgage are:
- Avoid Penalty
- Hold on to an existing interest rate
In other words, why would you want to pay a penalty, just to break and go into a higher rate mortgage?
But what if paying a penalty meant going into a much lower rate mortgage?
If the difference in rate is good enough, it may be able to justify the penalty – and then some. So in these cases, where the penalty is much smaller than the savings that result from a new, lower rate – it does not make sense to proceed with a blended mortgage strategy.
You currently have a $200,000 mortgage at 3% and you’re looking to add to an additional $200,000 at a new lower rate of 2%.
Using a perfect 50%/50% weighted average on $200,000 (current at 3%) + $200,000 (new at 2%) then your resulting rate on the new $400,000 blended mortgage would be 2.5% (a perfect 50/50 average of 2% + 3% rates).
So let’s say, again using this example, the Bank or lender quotes you the new blended rate of 2.5% and there is no penalty associated because you are blending the mortgage – not breaking it.
But what if the penalty to break the $200,000 mortgage was $1,500?
And, using the example above, what if you could break the existing $200,000 mortgage, pay the $1,500 penalty and have an entirely new $400,000 mortgage at 2% (not 2.5% like in the blended mortgage example).
Again, using the same example, because you are paying the $1,500 penalty to break the 3% mortgage, you can completely restart the mortgage at the lower 2% rate.
If that 0.50% rate difference, per year, ended up saving you $1,000 per year, for 5 years totaling $5,000, then it would be well worth paying the penalty in that case. In other words, paying $1,500 to save $5,000 makes sense.
If we are using fixed rate mortgages, then the savings is pretty much guaranteed as well because the rates would not be changing over the term. They are consistent so we can do the math much easier.
Again, an example was used to show that in some (in fact many) cases it is worth paying the penalty to break the mortgage. But just be sure to work with your lender closely to get the right information that is specific to your unique situation. Particularly making sure that you have accurate information for both breakage penalty, and also for the blended rate.
With accurate information, you will have a reliable result. Connect with us at Altrua and we can help you walk through the math to see if it makes sense to blend your mortgage or break and restart your mortgage at a much lower rate.