What are blended mortgages

The term "blended mortgages" refers to a mortgage arrangement where the borrower combines two mortgages into one. Let’s assume you have one mortgage at 2.5%, and a mortgage on another property at 5%; blending both mortgages could be an excellent option for you.

While blending mortgages can offer benefits, it's important to be aware of potential drawbacks as well. Keep in mind that specific terms and conditions can vary among lenders, so it’s important to use a lender who’s able to discuss these scenarios with you.

The benefits and considerations for blending a mortgage. 

Instead of paying off the existing mortgages and taking out a completely new mortgage, the borrower may choose to blend the existing mortgages into a single mortgage. This involves calculating a weighted average interest rate based on the remaining balances of the two mortgages.

The primary advantage of a blended mortgage is that it allows the borrower to retain some of the favorable terms of their existing mortgages, particularly if one of the existing rates is lower than the current market rates. This can result in cost savings compared to obtaining an entirely new mortgage.

While blended mortgages can be beneficial, there may be restrictions and fees associated with this process. It's essential for borrowers to carefully evaluate the terms, conditions, and costs associated with blending mortgages to determine whether it makes financial sense in their specific situation.

What is Interest Rate Differential and how does it apply to blending mortgages?

If you are breaking a mortgage before its maturity date, lenders often use an interest rate differential formula to calculate penalties. Before you decide on blending your mortgages, you may need to consider any penalties associated with breaking one or both of your existing mortgages.

Here's a breakdown of how Interest Rate Differential is typically calculated:

Existing Interest Rate: This is the interest rate on your current mortgage.

Current Interest Rate: This is the interest rate that the lender could charge for a mortgage with a term similar to the remaining term on your existing mortgage.

Remaining Term: The time left until your mortgage term expires.

The formula for calculating the IRD is:

IRD=(ExistingInterestRate−CurrentInterestRate)×RemainingTerm×MortgageBalance

This calculation represents the penalty or fee that the borrower would need to pay for breaking the mortgage early. The idea behind this penalty is to compensate the lender for the interest they would lose if you prepaid your mortgage before the agreed-upon term.

For more information on the benefits of blending a mortgage, contact one of our mortgage professionals at www.themtgagency.com