The Most Important Mortgage Feature for 2024

2023 was another consecutive year of rising interest rates as we grappled with getting a hold on inflation.

However, the end of last year showed some light at the end of the tunnel. Due to inflationary numbers coming in much better than expected, Bank of Canada (BoC) choose not to continue the pattern of additional increases to the prime lending rate for all of last quarter avoiding further increases to variable rate holders.

Fixed rates also took a significant drop in November and December. With many economists now speculating possible rates drops later this year from the BoC, for the first time in a while we are receiving encouraging news that we may be over-the-hump when it comes to how high interest rates are going to go.

With all this in mind, many consumers will think to opt for a 1, 2 or 3-year fixed rate term so they can potentially capitalize on lower rates in the future. However, banks are going to continue gouging consumers on these interest rate terms, capitalizing on the current speculation so you could be opting for a rate 0.50 – 1% higher than the standard 5 year rate term. To assume your interest rate is going to be so much better after the shorter term is a pretty big gamble in my opinion given all the uncertainty over the last few years.

But there is a mortgage feature that many advisors and consumers alike fail to understand, which is an excellent solution to this dilemma. That is ensuring you have a ‘blendable’ mortgage.

A blendable mortgage provides a homeowner the ability to access a lower rate based on a weighted average of your current rate and the new one being offered. It can also be used to refinance (i.e. pull equity out) without incurring a penalty.

For today, we will focus on the former and provide examples of how it can be used to access a lower interest rate.

When learning about blendable mortgages, you’ll notice there is two types: the “blend and extend” and the “blend to term” options. How does each one work, which one is better and is there a catch? Lets take a look.

Blend and Extend

Lets say you have 2 years remaining on your 5-year fixed term at 5.99% and you wish to access a lower rate now instead of waiting for the term to mature in two years.

With the blend and extend option, you will be allowed to renew into a new 5-year term, with your new rate being an average of the two years remaining at 5.99% and the new 5-year fixed rate at 4.49%:

5.99% existing rate -> 5.09% blended rate <- 4.49% new 5-year rate

Signing a new 5-year term might seem like a reasonable request to lower your payment and interest costs but here’s the catch – in order to use the blend and extend option most banks have a policy that requires you add new money to your mortgage to receive the blended rate or pay a penalty. So unless your goal is also to refinance, increasing your mortgage balance is counterproductive to becoming mortgage-free earlier.

Now there are a small number of lenders out there that have a much more fair and honest approach to the blend and extend option by not requiring you add money to your mortgage. Schedule a chat with us to learn more about your blend and extend options.

Blend to Term

Using the same example, lets say you are working on a shorter timeline or have reasons for not wanting to extend your term, as required with a blend and extend. A blend to term will allow you to blend two rates the same way, but instead of blending a new 5-year fixed term, it would be for only the remaining years left in your current term, in this example 2 years. For example:

5.99% existing rate -> 5.59% blended rate <- 4.99% new 2-year rate

Heres the catch.

Because the lender is agreeing to lower your rate without extending your term, they are choosing to lose money so most lenders will require that you access equity via increasing your mortgage amount. Otherwise if you choose not to access equity, the lender will usually charge you a portion of the prepayment penalty and add that to the mortgage balance.

Same as the blend and extend option, there are a select number of lenders we work with who have a much more considerate approach and will allow a homeowner to use their blend to term option without requiring them to add money, or incur a penalty to do so. You can lower your payment, lower interest and nothing is expected in return.

If you’re interested in learning more about blendable mortgages, and the best lenders to consider for this mortgage feature, schedule a chat with us today to learn more

Written by

Cody A. Rowe

Dominion Lending Centres

Modern Mortgage Group

Schedule a chat with me today.