In the current economic climate, many Canadian homeowners are exploring options to manage their mortgage payments as renewal approaches. One strategy gaining attention is the 'blend and extend' approach, which allows borrowers to combine their existing mortgage rate with a new, potentially higher rate, while extending the term. Christopher Liew, a financial columnist, delves into whether this strategy is beneficial.
What Is Blend and Extend?
A blend and extend mortgage involves merging your current interest rate with the lender's current rate, creating a blended rate that is typically lower than the new rate but higher than your existing one. The term is also extended, often by a few years. This can provide payment stability and avoid a sudden jump in rates upon renewal.
Pros of Blend and Extend
- Rate Certainty: Locks in a rate that may be lower than future renewal rates, especially if interest rates are rising.
- Budgeting Ease: Extends the term, smoothing out payment increases over a longer period.
- No Penalty: Often avoids prepayment penalties that come with breaking a mortgage early.
Cons of Blend and Extend
- Higher Overall Cost: The blended rate may be higher than your current rate, and extending the term means paying interest longer.
- Missed Opportunities: If rates drop later, you may be locked into a higher rate.
- Limited Flexibility: Extending the term can delay full ownership of your home.
When Should You Consider It?
This strategy is best for homeowners who need payment stability and are concerned about significant rate hikes at renewal. It may also suit those with upcoming financial changes, such as reduced income. However, if you plan to sell or pay off your mortgage soon, it may not be ideal.
Consulting a mortgage professional is crucial to assess your specific situation and compare options. The decision depends on your financial goals, risk tolerance, and market expectations.
