As a homeowner in Ontario, you might find yourself in a common but tricky situation. Perhaps you have a fantastic, low-interest mortgage that you secured a few years ago, but you now need to access your home's equity to pay for a renovation or consolidate debt. Or maybe you're watching current interest rates creep up and you’re worried that by the time your mortgage renews in a year or two, rates will be significantly higher than they are today.

You feel the need to take action, but you're stopped by one major obstacle: the massive prepayment penalty your lender will charge if you break your current mortgage contract. It can feel like you're trapped, forced to either pay a five-figure penalty or do nothing at all.

When you’re in this situation, your bank will almost always offer you what seems like a perfect solution: the "Blend and Extend." It’s a way to refinance your mortgage without paying a penalty, and it's one of the most common products offered by major lenders.

How Does a Blend and Extend Work?

A blend and extend is a way to combine your existing mortgage with a new one. The lender takes your current, low interest rate and "blends" it with their current, higher interest rate to create a new, custom rate that's somewhere in the middle.

The Core Concept: A Weighted Average

The most important thing to understand is that you are not getting the best new rate available on the market. Your new rate is a weighted average based on how much time is left on your old term and the length of your new term. The lender is essentially calculating a new rate that allows them to maintain a certain profit margin over the life of your new loan.

A Step-by-Step Calculation Example

The math can seem complex, but let's break it down with a clear example.

Your Current Mortgage: You have a $400,000 mortgage balance with 2 years (24 months) remaining on your 5-year term, at a great rate of 2.5%.

The Lender's Current Rate: You want a new 5-year fixed term, and your lender's current rate for that is 5.0%.

The lender calculates your new "blended" rate using a weighted average. While the exact formula varies slightly between lenders, it looks something like this:

[(Your Old Rate × Months Remaining) + (Their New Rate × New Months)] ÷ Total Months

In this case, you are adding a new 5-year (60-month) term, but you are replacing the 24 months you have left. The calculation is based on the 24 months at the old rate and the next 36 months at the new rate. The math works out to a new "blended" rate of roughly 4.1% for your new 5-year term.

The "Extend" Part of the Deal

A crucial and non-negotiable part of this arrangement is the "extend." You cannot simply get this new blended rate for your remaining two years. To get this deal, you must commit to a new, longer term with the same lender—most commonly, another 5-year term.

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When is Blending and Extending a Good Idea?

Despite some significant drawbacks (which we'll cover next), there are specific situations where a blend and extend can be a very sensible strategy.

To Access Equity Without a Penalty

This is the number one reason homeowners choose this option. Let's say you need to refinance to pull out $100,000 in equity for a major home renovation, but your prepayment penalty is calculated to be $15,000. A blend and extend allows you to access that equity by creating a new, larger mortgage at the blended rate, while completely avoiding that painful penalty. For many, saving $15,000 today is the most important factor.

To Secure a Rate in a Rising Market

Imagine you have one or two years left on your mortgage term, and all economic indicators suggest that interest rates will be much higher by the time you are scheduled to renew. A blend and extend allows you to "lock in" a new rate today. While this new blended rate will be higher than what you're currently paying, it may be significantly lower than the rates that will be available when your term is actually up, potentially saving you from a major "payment shock" down the road.

When You Have a High "Posted Rate" Penalty

This is a key broker insight. As we've discussed in other articles, the big banks often calculate their Interest Rate Differential (IRD) penalties using their inflated posted rates, not the discounted rates they actually give customers. This can lead to massive, unfair penalties. If you are trapped in a mortgage with a very high IRD penalty, a blend and extend may be your only practical way to make a change without facing an astronomical fee.

The Drawbacks Your Bank Won't Mention

A blend and extend is a tool of convenience, but convenience often comes at a cost. Here are the significant hidden drawbacks that you need to be aware of.

The Rate is Rarely the Best on the Market

This is the biggest catch. The blended rate is almost never as low as the best market rate you could get by switching to a new lender. Your bank is offering you a deal that looks good only when compared to paying a huge penalty. It rarely looks good when compared to what other lenders are offering new clients. For example, your bank's blended rate might be 4.1%, but a mortgage broker might be able to find you a new lender with a market-leading rate of 3.8%. While that 0.3% difference seems small, on a large mortgage over five years, it can add up to thousands of dollars in extra interest payments.

You Lose Your Negotiation Power

The blend and extend is a take-it-or-leave-it offer from one lender: your current one. By accepting it, you immediately give up your single greatest power as a borrower: the ability to shop the market. You are willingly locking yourself into a new long-term contract with a lender without ever finding out if their offer is truly competitive. You lose all your negotiation power because you are not a new client they are trying to win over.

It Can "Kick the Can Down the Road"

If your penalty is high because your existing interest rate is very low, blending it into a new, higher rate means your monthly payments will go up sooner than they have to. The more financially optimal, albeit more patient, strategy might be to simply ride out your fantastic low rate for the remainder of your term. You would then be free to shop the entire market at your scheduled renewal date, penalty-free. A blend and extend can sometimes be a premature move that costs you more in the long run.

Restrictive Features Can Carry Over

If your original mortgage had restrictive features, such as being registered as a collateral charge that makes it difficult to switch lenders, these features often carry over into the new blended mortgage. This means you are not only accepting a potentially uncompetitive rate, but you are also re-committing to another five years with a product that is designed to keep you tied to that one bank.

A Broker's Analysis: Blend vs. Break

So, how do you truly know if a blend and extend is a good deal? You don't guess; you calculate. As brokers, this is one of the most valuable calculations we perform for our clients. We put the bank's offer to the test.

The Calculation We Run for You

We create a clear, side-by-side comparison of your two main options:

Option A: The "Blend and Extend" Deal: We take the blended rate offered by your bank and calculate your total interest payments over the new 5-year term.

Option B: The "Break and Switch" Deal: First, we calculate your exact prepayment penalty. Then, we shop the entire market to find you the absolute best 5-year rate from a new lender. We then calculate your total interest paid over that 5-year term and add the one-time penalty cost.

The Result

We present you with a clear statement: "Option A will cost you a total of $X over five years. Option B, even after paying the penalty, will cost you a total of $Y. " In many cases, clients are shocked to find that paying the penalty and moving to a new lender with a lower rate (Option B) is actually cheaper in the long run.

Making a Decision to Blend and Extend

The blend and extend strategy is a useful tool in a homeowner's toolkit. It can be the right move in specific situations, particularly when faced with an enormous and unavoidable prepayment penalty. However, it's a tool of convenience, not always one of financial optimization.

The only way to know if your bank's offer is a good deal is to compare it to the entire mortgage market. Before you accept their offer, you owe it to yourself to find out what you're leaving on the table.

If your bank has offered you a blend and extend, contact our brokerage today. We will provide a free, no-obligation cost analysis to show you how their offer stacks up against the best products available across Canada.

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