Blended Rate

Key takeaways

• A blended rate is an interest rate that combines an existing rate with a new rate, typically when loans are refinanced or multiple debts are pooled.
• It is calculated as a weighted average of the interest rates on each loan, using outstanding balances as weights.
• Blended rates are used for mortgages, personal loans, and corporate debt to reflect the aggregate cost of borrowing.
• They can reduce overall interest costs compared with taking only a new higher-rate loan, but usually are higher than the original low rate.

What is a blended rate?

A blended rate represents the combined effective interest rate when one or more loans with different rates are merged or when new borrowing is added to existing debt. Lenders often use blended rates to retain customers during refinancing or to price pooled corporate debt. For borrowers and companies, the blended rate shows the true cost of outstanding debt after changes.

How to calculate a blended rate

Use a weighted average based on loan balances:

Blended rate = (Σ(balance_i × rate_i)) / (Σ balance_i)

Steps:
1. Multiply each loan’s outstanding balance by its interest rate.
2. Sum those interest amounts.
3. Divide the sum by the total outstanding balance across loans.

You can also use free online blended-rate calculators to speed up the process.

Examples

Corporate debt example

Company has:
* $50,000 at 5%
* $50,000 at 10%

Blended rate = (50,000×0.05 + 50,000×0.10) / (50,000 + 50,000) = (2,500 + 5,000) / 100,000 = 7.5%

Alternate corporate example (showing interest amounts)

Company has:
* $1,000 at 5% → $50 interest per year
* $3,000 at 6% → $180 interest per year

Total interest = $50 + $180 = $230
Total balance = $4,000
Blended rate = 230 / 4,000 = 5.75%

Personal mortgage refinancing example

Existing mortgage: $75,000 at 7%
New borrowing: $75,000 at 9% (refinanced amount)
If both balances are equal, blended rate = (75,000×0.07 + 75,000×0.09) / 150,000 = 8%

A lender might offer a blended rate somewhere between the old and new rates (e.g., 8%) to retain the borrower.

When blended rates are used

• Refinancing a mortgage while keeping some of the old balance
• Combining multiple loans into one consolidated loan
• Companies reporting the aggregate interest cost on pooled debt
• Pricing increases when adding a second mortgage or home equity loan

Pros and cons

Pros:
* Can lower the effective rate compared with taking only new, higher-rate debt.
* Preserves some benefit of an existing lower rate.
* Simple to compute and transparent for planning.

Cons:
* Often higher than the original low-rate loan.
* May not capture fees or prepayment penalties associated with refinancing.
* Not always the best option if market rates have fallen significantly.

Bottom line

A blended rate is a practical tool for reflecting the combined cost of multiple interest rates when loans are merged or refinanced. Calculated as a weighted average, it helps borrowers and companies understand their true interest burden and decide whether refinancing or consolidation makes financial sense. Always compare total costs, fees, and alternatives before committing to a blended-rate arrangement.