It comes down to predictability.
In earlier blog posts, we discussed fixed rates and variable rates.
The big difference involves a question of predictability: a fixed rate allows you (if you so desire) to calculate how much of your payments will go to principal for the duration of your contract (called your term).
A variable rate is probably a little lower at the front end, but fluctuates with the Bank of Canada prime rate. Therefore, predictions are more generalized.
If the Bank of Canada raises the prime rate, fixed rate payments don’t change until the end of the term. The interest portion of variable rate payments, however, will go up tout de suite. Either way, unless your principal is close to zero, at some point you’ll need to negotiate a new term at the new rate. So what is a blended rate?
Simply put, it’s a way to reward customers for keeping a mortgage with the original lender, or for moving their loan to their institution. It’s a little bit like a magazine offering current subscribers a chance for lower prices if they resubscribe. New homebuyers won’t be able to take advantage of a blended rate — it’s something you can ask about at the end of your first term.
If you currently pay a fixed rate of 3% interest, but since you signed the lender’s rate has gone up to 5%, you’ll be looking at an uptick in your rate when you negotiate the next term. The lender might offer you something in-between (say, 4% or 4.25%) in hopes that you will stay with them for another three or five years.
Conversely, their competitor could potentially offer you a blended rate in the hopes that you’ll jump ship. We know that some of these concepts are complex. If you’re not sure if, or how, one of these bits of jargon applies to you, let us know!