How a Blended Mortgage Works

When you have a fixed-rate mortgage and interest rates drop, you might wonder if there’s a way to take advantage of better market conditions.

Blended mortgages, including blend-and-extend mortgages, allow you to do just that — without breaking your current mortgage.

What is a blended mortgage?

A blended mortgage combines your original mortgage rate with a new, current one. You keep your existing mortgage, but the new interest rate falls somewhere between your old mortgage rate and the rates your lender is offering today.

Since you’re technically not breaking your current mortgage contract, you aren’t charged a prepayment fee when you blend a mortgage. (This is not the case if you refinance or change lenders mid-contract, which can result in severe prepayment penalties.) You may have to pay some administrative fees, but a blended mortgage should give you a better interest rate, which will save you money.

Blended mortgages also allow you to access the equity in your home before your current mortgage term is up. Depending on current interest rates, this may be a cheaper option than a home equity line of credit.

» MORE: What’s the difference between a fixed and variable-rate mortgage?

Types of blended mortgages

Blend-and-extend mortgages

This is the most common type of blended mortgage, where you mix your existing interest rate with the current rate offered and extend your term.

For example, let’s say you have a fixed-rate mortgage at 6.5% and you still have three years left remaining on a five-year term. Let’s assume current fixed mortgage rates are around 4.8%. If you were to blend and extend your mortgage, you’d get a rate somewhere in-between the two rates, so around 5.5%. Your term would then be extended by two years to go back to a five-year term.

Blend-to-term mortgages

With blend-to-term, you still get a blended interest rate, but there’s no time added to the term. If you have two years left on your term, your new extended rate would last for that period only. Once your term is up, you would get a new mortgage.

Which is better: blend-and-extend or blend-to term?

It’s hard to say which type of blended mortgage is better. If you’re looking for stability, a blend-and-extend may be the right choice. Alternatively, if you think rates will continue to fall, blend-to-term would allow you to shop around for the best rates when your term is up.

Is a blended mortgage a good idea?

Even though the advantages of a blended mortgage are often clear, there are some disadvantages to consider, too. Always take a look at the pros and cons before you make your decision.

Pros of a blended mortgage

Cons of a blended mortgage

Alternatives to a blended mortgage

Break your current mortgage

If interest rates have fallen considerably, you could just break your mortgage. The fee you pay is in your contract but would be based on either three months’ interest or the interest rate differential, which depends on whether your mortgage is open or closed.

If the money you’ll save over the course of the mortgage term is more than the fee, then making the switch makes sense.

Get a home equity line of credit

If your goal is to unlock equity, it may be easier to get a home equity line of credit (HELOC). A HELOC is a revolving line of credit that’s secured with your home. With a HELOC, you could access up to 80% of your home’s value. There might be administration, legal and appraisal fees involved, but once set up, you’ll make interest-only payments on any funds you’ve borrowed.

A blend-and-extend mortgage is popular when interest rates have dropped. However, if rates are on the rise, you may want to consider other types of mortgages.