Depending on who you ask or what article you’re reading, mortgage interest rates will either stay higher for longer or they’re expected to trend lower. There’s a lot of rate speculation happening in the market right now, but even the most seasoned experts can’t predict with absolute certainty which direction rates will go. Recall that just recently, on July 12, the Bank of Canada hiked its benchmark rate from 4.75% to 5% in a move that was widely unexpected by economists.
Meanwhile, for homeowners, particularly those with variable rate mortgages or mortgages coming up for renewal, all the mixed signals and differing opinions has made it difficult to determine how to actively approach their mortgage.
The good news is that, despite today’s higher rates, there are ways to offset the impact of increased borrowing costs. During uncertain market conditions — that in-between period when nobody is sure which direction rates will go such as the one we are in today — the blend and extend mortgage is worth considering, and depending on your situation, it may even be your best bet.
What is blend and extend?
Vancity’s blend and extend feature gives you the opportunity to immediately renew your mortgage term for another 5 years at a brand-new interest rate that’s somewhere between your existing contract rate and today’s current rate.
Think about it like you’re hitting the reset button on your fixed term! If you have a good interest rate right now, it’s a creative way to take advantage of your lower rate for a longer period of time. All this at no additional cost to you.
How does it work?
Like the name suggests, this feature blends your existing interest rate with the current rate offered and extends your term at the same time. For example, if you have 2 years remaining in your 5-year fixed term, if you choose to blend and extend your mortgage now, you will receive a new blended interest rate for an additional five years.
Calculating your new interest rate will depend on multiple factors of your mortgage, including the number of months remaining in your term, the current amortization, and the ratio between your total loan amount and the value of your home.
Instead of rolling the dice at maturity to see where rates land, applying a blend and extend to your mortgage today could mean you avoid the risk of much higher interest rates when it’s time to renew, especially when you consider that the effects of interest rate hikes can take 12 to 24 months to play out in the economy.
What are the advantages?
This option may be particularly beneficial for members who are risk averse. By utilizing blend and extend, you can secure your mortgage rate today and protect yourself from more rate increases. Plus, you’re extending your runway so you can plan ahead. Knowing how much your mortgage costs over 5 years will allow you to prepare your financial plan, budget wisely, as well as gain a sense of stability.
Did we mention that there are no penalty fees? It’s worth repeating that no mortgage pre-payment penalties apply with the blend and extend mortgage option. Since you’re not breaking your contract, you won’t be subject to a pre-payment penalty, which in some instances, can set you back in cost savings.
Is blend and extend right for you?
Because you’re keeping your existing mortgage and not breaking your contract, it’s important to note that you can’t make changes to the loan’s principal balance. Adding new money is considered a traditional refinance, which would be subject to a penalty fee.
The same goes for selling your home before your term is up. If you’re planning to move or sell, the blend and extend may not be the best option for you since you would be breaking your newly extended term and incurring the pre-payment penalty.
Alternatives to a blend and extend.
Even if you have a higher risk tolerance and prefer to ride it to the end of your term, knowing what options are available to you lets you make the most informed decisions about your finances.
If the blend and extend doesn’t suit your circumstances, consider making a lump sum payment towards your mortgage. You can make an extra payment of up to 20% of your original principal mortgage every year, and any amount you make — large or small — goes directly towards paying down your balance and reduces your overall interest costs.
Make the most informed decision about your mortgages.
In the wake of successive interest rate increases from the Bank of Canada over the course of 2022 and 2023, understanding what mortgage options you have is more important than ever. At Vancity, we strive to provide you with options and information to make home ownership more affordable.
Sometimes when you don’t know what to do, it’s easier to wait on the sidelines until there’s a clear indicator pointing you one way or another. But when it comes to your mortgage, that approach could potentially cost you more in interest.
Instead of waiting around to see what the Bank of Canada will do, knowing what’s available to you lets you take control of your personal financial health. While we don’t have a crystal ball to tell us if rates will go up or down, what we know for sure is that mortgage rates are constantly fluctuating, and Vancity is here to help you through it.
Determine if the blend and extend is right for you by booking an appointment with a mortgage advisor today. We’ll help you calculate your blended rate and walk you through the process, one step at a time.