Mortgage Blend and Extend

“Mortgage Blend and Extend” is a post by Adina J in which she explains why, for once, she plans to follow the advice she got from a bank. A bank!

If you’re a regular TiFi Reader, you already know my feelings about banks. I may not be a conspiracy nut who wears tinfoil hats, but nonetheless I don’t trust large financial institutions – certainly not when it comes to looking out for my best interests. So imagine my surprise when I recently received some advice from a bank employee which turned out to be actually, well, good: to blend and extend my mortgage. Not only was the advice good — it was Wise Beard Man-approved.

First, some context. I currently have a 5-year fixed mortgage at 4.17%, due to expire in January 2015. The reason for that ungodly high rate is poor timing; I sold my old condo and bought my current house part way through another fixed term mortgage. My old mortgage rate (circa late 2006) was blended with the new rate I was able to obtain in January 2010 for my house, and the term was extended for another 5 years. Because rates in early 2010 were lower than in 2006, I was actually able to get a better deal, interest-wise, than previously thanks to the blend and extend. Sadly, it wasn’t nearly as good as it would have been had I started with a clean slate in 2010. (Another reason that single ladies should rent rather than buy condos: you never know when you’ll meet The One.)

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This past December, I had an appointment to see my mortgage adviser. It’s an annual ritual: I drop off a cheque for a lump-sum payment against the mortgage principal, and she tries to sell me various bank services I don’t want. This time, there was a slight deviation in our routine. Unprompted, she mentioned that I might want to look into the option of a blend and extend on the current mortgage come May. I was confused, to say the least. The only time I’d heard of the blend and extend was in the context in which I’d encountered it before: porting over an existing mortgage rate to a new property, after selling the old, in order to avoid interest penalties associated with early termination of the old mortgage. Apparently, that is not the only situation in which the blend and extend can be used. Banks will also let you do it as a form of early renewal of your fixed-rate mortgage. This assumes, of course, that you intend to lock in for a fixed rate again.

Personally, I’ve always had a fixed rate and suffered for it. I’ve chosen the fixed rate option before because I like its certainty, but happened to do it at a time when interest rates were at a peak that has since bottomed out. But! For the first time in a long time, it looks like a fixed rate mortgage might be the way to go. Everyone and their dog (and not least of all the Wise Beard Man) is predicting that interest rates shall rise again. The specter of 7, 9 and even higher percentages have been raised. This means that anyone who can should lock-in today’s ridiculously low rates before they vanish.

With my mortgage coming up for renewal in a few years, a blend and extend is a no-brainer. The mortgage advisor suggested that my mortgage rate, after the blend and extend, would be somewhere in the region of 3.6% – a decent decrease and not a bad rate for another half-decade. If I choose this route, I will be locked in until mid-2018, by which time one of three things will almost certainly have happened:

• Interest rates will be higher than at present but still below the long term average, say around 5-6%;
• Interest rates will be around the long term average; or
• Interest rates will be painfully high.

Regardless, by 2018 we’ll have paid at least another $100,000 (probably more) on our mortgage principal and the impact on our finances of a higher rate will be tolerable.

Needless to say, I am pretty certain that I will blend and extend come May. Frankly, I can’t see the downside (and feel free to tell me otherwise in the comments). Once the blended (lower) mortgage rate is in place, I will keep our accelerated mortgage payments at the existing level, so we’ll be paying off even more of our principal every year. My goal is to get the principal down as close to $200,000 as possible by 2018 – meaning we would have essentially halved the mortgage in 8 years.

There you have it, folks – better check for flying pigs dive-bombing your windows because it looks like a bank actually gave me useful advice for once.

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