Blend-and-Extend: The Alternative to a Full Break

When the breakage penalty for a fixed-rate mortgage makes a full break unprofitable, blend-and-extend is an often overlooked but potentially advantageous alternative. This strategy, offered by most Canadian lenders including major banks and Desjardins caisses in Quebec, allows you to combine your current rate with a new rate in a weighted average, in exchange for extending your commitment. Unlike a full break, blend-and-extend generally involves no breakage penalty and no legal or appraisal fees, making it a particularly attractive option in situations where the interest rate differential (IRD) would produce a prohibitive penalty.

How the Blended Rate Calculation Works

The blended rate resulting from a blend-and-extend is calculated as the weighted average between your current contractual rate and the rate offered for the new term, weighted by the number of months remaining at the old rate and the number of months in the new term. The formula is: Blended rate = (Current rate x Remaining months + New rate x Additional months) / Total months of new term. For example, with a current rate of 5.50% and 18 months remaining, combined with a new rate of 4.50% for 42 additional months (new total term of 60 months), the blended rate would be: (5.50% x 18 + 4.50% x 42) / 60 = 4.80%. This 4.80% rate is lower than your current 5.50% but higher than the 4.50% market rate. The question is whether the savings obtained justify committing to a full new term.

Direct Comparison: Blend-and-Extend vs Full Break

• Upfront costs: Blend-and-extend generally has no upfront cost ($0), while a full break involves a penalty ($3,000 to $25,000) plus legal, appraisal, and discharge fees ($2,000 to $3,500).
• Rate obtained: Blend-and-extend produces a blended rate above the market rate. A full break provides access to the best negotiated rate available through a mortgage broker.
• Lender choice: Blend-and-extend locks you in with your current lender. A full break allows you to choose among all market lenders, including monoline lenders who often offer the best rates.
• Commitment length: Blend-and-extend commits you to a full new term (typically 5 years). A full break offers the flexibility to choose a shorter term if desired.
• Complexity: Blend-and-extend is done in a simple conversation with your lender. A full break requires a complete qualification process including the B-20 stress test.

When to Prefer Blend-and-Extend

Blend-and-extend is the best option in several situations specific to the Quebec context. First, when the IRD penalty is disproportionately high relative to potential savings — which is common with major banks that calculate the IRD using the posted rate rather than the contractual rate. Second, when you have difficulty requalifying under OSFI's B-20 rules due to changes in your financial situation (income, debts, employment). Third, when little time remains in the current term (12 to 24 months) and the savings from a full break do not justify the costs. Fourth, when you are satisfied with your current lender and their general conditions (prepayment privileges, customer service) and the blended rate offered is acceptable.

When a Full Break Is Preferable

A full break remains the best option in other equally common situations. When the spread between the blended rate obtained through blend-and-extend and the best market rate exceeds 0.50%, the additional savings from a full break over a 5-year term can easily offset breakage costs. When you have a variable rate (penalty = 3 months' interest only) or a loan with a monoline lender (IRD penalty calculated more fairly), breakage costs are significantly lower. When you also want to consolidate high-interest debt, which is not possible with a simple blend-and-extend. And finally, when you want to access the equity accumulated in your property for an investment or project, full refinancing is the only option.

Blend-and-extend

A mortgage strategy involving renegotiating the rate of an existing mortgage with the current lender by combining (blend) the current contractual rate with the new offered rate to create a weighted average rate, while extending (extend) the term duration. This operation avoids the breakage penalty and transfer fees, but the rate obtained is always higher than the best open-market rate.