In the world of home financing, Albertans are always on the lookout for ways to maximize affordability and minimize financial strain. One such option that has become increasingly popular is the blended mortgage interest rate.

Blending interest rates allows homeowners to merge old and new mortgage rates, which can provide financial flexibility and stability. Read on to learn what a blended mortgage interest rate is, how it works, the benefits and why it may be a good option for you.

What is a blended mortgage interest rate?

A blended mortgage interest rate is a new rate created when a borrower takes an existing mortgage with a lower interest rate and blends it with a new mortgage at a higher rate. Instead of paying out penalties to break the existing mortgage and fully switch to a new rate, lenders offer to “blend” the two rates, resulting in a single new interest rate for the mortgage term. This blended rate is typically somewhere between the old and the new rate, offering a middle ground.

How to blended rates work?

Blended rates come into play when a homeowner wants to borrow more money or refinance during their mortgage term, but breaking the current mortgage agreement would incur penalties, especially if their existing rate is lower than current market rates. A blended mortgage allows the homeowner to top up their mortgage without triggering a significant financial penalty.

For example, imagine you currently have a mortgage with an interest rate of 3% and you want to refinance or borrow more money at the prevailing rate of 5%. Rather than breaking your mortgage and refinancing the entire balance at the 5% rate, your lender might offer you a blended rate of, say, 4%. This blended rate is calculated by averaging the existing mortgage rate and the new rate, weighted according to how much principal remains on the current mortgage versus the amount of new borrowing.

Lenders use a formula to determine the blended rate that factors in the remaining balance on the original mortgage, the remaining term and the amount of new mortgage financing required. The formula aims to ensure that the lender covers potential losses they might face due to the difference in interest rates while also offering the borrower a reasonable compromise.

Advantages of a blended mortgage rate

For homeowners facing changing financial needs, such as taking out equity from their homes for renovations, consolidating debt or even purchasing additional property, blended mortgages can be an appealing option. Here are a few reasons why:

• Avoids early payment penalties ─ One of the primary advantages of a blended mortgage is the ability to avoid early mortgage repayment penalties. Many mortgages have steep penalties for breaking the terms early, which can be equivalent to several months' worth of interest payments. By blending the old and new rates, homeowners avoid this expense.
• Access to more capital ─ A blended mortgage allows homeowners to access additional funds without breaking their original mortgage. Whether you’re looking to renovate, invest in other opportunities or consolidate high-interest debts, this option gives the flexibility to borrow more money under potentially better terms.
• Middle-ground interest rate ─ Even though you may not get the original lower rate or the new higher one, blending often results in a rate that’s more favorable than locking in entirely at the higher market rate. This can help make borrowing more affordable in the short term, especially during periods when rates are rising.
• Financial flexibility ─ Life changes and so do financial circumstances. A blended mortgage can provide a level of flexibility that’s ideal for homeowners who find themselves needing to adjust their mortgage without undergoing a complete refinancing process or paying significant penalties.

Potential drawbacks of a blended mortgage rate

While blended mortgages have several advantages, there are also some potential downsides to consider:

• Higher rates than original − While the blended rate may still be better than fully refinancing at the new rate, it’s likely higher than your original rate. This means your overall interest payments may increase compared to staying within your original mortgage.
• Complexity − Blended mortgages can be more complicated to understand and different lenders have varying formulas for how they calculate the blended rate. It’s crucial to carefully assess any offer and consult with a mortgage specialist to ensure you understand how much you’ll be paying.
• Not always the best option − Depending on how much longer you have left on your current mortgage term, it might make sense to simply pay the penalty and refinance. In cases where interest rates are expected to drop in the near future, locking into a blended rate may not be the most advantageous decision.

In closing

Blended mortgage interest rates provide homeowners with an alternative option for managing their mortgages when interest rates rise or when they need access to additional funds. However, it’s essential to weigh the pros and cons carefully, as blended mortgages are not always the best choice depending on individual financial goals and market conditions. If you’d like to consult a mortgage advisor to discuss your options, I can suggest several experts in the industry.