Feb
22

Blending Vs. Blending-And-Extending: What The Diff?

Today’s post focuses on a little-known mortgage feature that some lenders do not have, but that can bite you in the rear at the most inopportune time: When it’s time to move your mortgage. We’re talking about blending vs blending-and-extending your mortgage when you’re moving up, across or even down the property ladder. What do I mean by this exactly? Easy:

When you sell your property and buy another one, and if the math makes sense to stay with your bank or lender, you have the option to transfer your mortgage over. Hidden deep deep down in the disclosure documents you received when you first bought your house and took out a loan was the option to blend OR blend-and-extend. Not every lender has both options and here’s why it can get rather messy:

If you’re breaking in the middle of a term (let’s say a 5 year), and moving, some banks or lenders will force you to “ride out” the existing number of months you have left and blend your rate. However where this becomes complicated is, these lenders force you to use the much harder qualifying rule, therefore, even though you’ve gone firm on your purchase & sale, and you went to the bank to make sure you qualify, the bank forgot to apply the harder qualifying rule and voila: you’re now left with having to pay a penalty to leave.

Some numbers to back this up please you ask? Here you go:

Sonya and Billy bought a house in 2013 and just had triplets. Their 2 storey townhouse had only 2 bedrooms and they are running out of room. They have a 5 year fixed mortgage at 3.19% from 2013 December, and now, they bought a new 5 bedroom home and are increasing their mortgage by $150,000 to $600,000 from $450,000. Combined they earn a gross annual income of $115,000.

Under the current 5 year fixed rule, they qualify beause their borrowing ratios are 33 and 40. However, if they are with a lender that only lets them ride out the term, suddenly their ratios jump to 40 and 47! And guess what? The maximum ratios allowed now are 39 & 44 - much much higher than what they have, which forces them to break this term early and pay that penalty they were not expecting. Ouch!

Some other things to consider when porting your mortgage.

If you don’t have 20% down you can still transfer over the CMHC premium that you originally paid on your property however it is calculated as the difference of your current balance and the new money you want, but at a higher premium rate. CMHC allows for the lesser of the two premiums which is a nice thing (how often does that apply in finance? Almost never!).

Some lenders will allow you to keep your existing balance at the existing rate and get a whole new balance for the new money at a new rate. The math never lies and will show you whether this makes sense or not - plus, this might make you have two maturity dates which can get complicated at renewal time (and, offer less flexibility).

Finally, some of the nastiest portability restrictions are where you cannot increase your mortgage without a penalty. I hate these and always stress to clients to try and stay away from them (no matter how tempting the rate may be). Unless you’re the sole owner of a crystal ball (that works), I have yet to find a client who can guarantee me that they will own the property in the future 100%.

Ask me anytime to review your mortgage options and we can see what portability features you have (or, are lacking) and how to get you on the right track.

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