Blend and Extend Interest Rates
"Pack the mortgage when you move" is Helen Morris’s excellent article that appeared in the National Post on Saturday October 2nd 2010. The topic is dear to my heart! I agree with her message that not all portable mortgages are equal and therefore one should look at the fine print carefully. I will add to that caveat by emphasizing the importance of an amortization schedule. An amortization schedule is a financial road map! In order to
determine if a Bank is offering you a fair deal blending and extending your mortgage you require five amortization schedules. Using the articles example, assume 35 years remains in the amortization period and the balance is $250,000 and the rate is 3.59%.
QUESTION: What would the new blended interest rate be if an additional $100,000 is borrowed and added on to your existing mortgage at 7%?
In principle the analysis is simple. Use the same monthly cash flow with different
interest rates and compare the outstanding balance (at 5 years) of the proposed blended loan to the total balance owing of the two separate loans at 3.59% and 7%. Five years was arbitrarily chosen. It also helps to have financial software that is able to instantly display the specific amortization schedule (Also this software must also be able to calculate any one of the four variables, once any three are entered in the calculator).
Two separate loans are used as the reference point..
$250,000 at 3.59% at $1046.31 per month
$100,000 at 7% at $638.86 per month
The total monthly payments for the two loans is $1,685.17
The total of the two loan balances owing after 5 years is $326,446.
Letting the calculator decide the blended rate.
If your Banker used a financial calculator and entered the numbers to calculate the rate required to amortize a loan of $350,000 for 35 years making monthly payments of $1,685.17 the blended rate would be 4.6322%.