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I currently have a mortgage balance of 230k @ 5.4% until Jun 2012. I checked with my bank to see what the blend and extend to a new 5 yr term would be and was quoted 5.1%. This seemed high and eventually I found out it's because they calculate the rate based on the original posted rate when I signed the contract - 6.7% (not the discounted rate I actually pay).

Next I asked for a quote for what the ird penalty is and was quoted 13k, again thanks to the posted rate versus actual rate game.

But, now I'm wondering, what's to stop me from signing up for the blend and extend being offered at 5.1% (with a posted rate of 5.39%). Once the contract is signed I ask to break the contract and pay the penalty. The ird is based on the original posted rate 'minus' the current posted rate for the term length closest to the time remaining on the contract. In this example it's the same as the posted rate therefore, the ird penalty equals 0. The 3 month interest penalty would kick in to a sum of 3k. Seems like a 10k saving and a new rate of 3.7% for a 5yr fixed.

I'm worried about rates being significantly higher when my contract is up in 2012 and I wanted a secure rate I know I can handle and still make significant extra prepayments to pay down the principal down faster. Looking into this started off as simply wanting a blended rate of my current 5.4% for the remainder of my term, with 3.7% for the last 3 yrs. I was not looking to break my commitment and obligation that I signed and agreed to, but this posted rate game of using 6.7% bothered me, and motivated me to investigate a little further.
 

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Very interesting idea.

Isn't the current posted rate equal to the normal 5 year mortgage offering? (ie not your blend/extend). I would have expected it to be about 4.09% which is what the TD page is showing right now.

Blend and extend is just BS anyway.
 

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Seems like a 10k saving and a new rate of 3.7% for a 5yr fixed.

They are not obligated to give you a new mortgage. They can say "Sorry, we think you are a bad risk, and besides you are gaming the system. Pay us $230K and go elsewhere." So, even if you manage to cheat them out of any ird, they've got you for the principal, plus legal and administrative fees to discharge the mortgage.
 

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Seems like a 10k saving and a new rate of 3.7% for a 5yr fixed.

They are not obligated to give you a new mortgage. They can say "Sorry, we think you are a bad risk, and besides you are gaming the system. Pay us $230K and go elsewhere." So, even if you manage to cheat them out of any ird, they've got you for the principal, plus legal and administrative fees to discharge the mortgage.
Actually if the bank committed to the blend and extend and month later he went to another lender to the mortgage paid out there would be nothing the bank could do if there wasn't anything in the contract preventing it.

I am still seeking an answer on this. Although a good idea, I am confident it is covered in the mortgage contract.
 
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