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Close End Mortgage – Definition

Close-End Mortgage Definition

A closed-end mortgage is a mortgage agreement that does not permit a borrower to take an additional amount without repaying the current mortgage and taking permission from the mortgage lender.  A closed-end mortgage is otherwise called a “closed mortgage”, this type of mortgage restricts a mortgagor from refinancing, renegotiating or seeking an additional loan without paying a breakage fee to the lender.

Taking out a second mortgage without receiving permission from a lender is not admissible in a closed-end mortgage. This type of mortgage also disallows the use of collateral that has been previously pledged to another lender.

A Little More on What is a Closed-End Mortgage

Closed-end mortgages are common in Canada, these mortgages offer lower interest rates and are not repaid earlier than the maturity date. A closed-end mortgage as a restrictive mortgage is more appropriate for mortgagors who intend to occupy a home for a long period without plans of moving. This is because any attempt to renegotiate or refinance the mortgage attracts extra costs that a borrower is mandated to pay to the mortgage lender. While the closed-end mortgage offers lower interest rates to the borrower, it grants a form of security to the mortgage lender.

Restrictions Imposed by Closed-End Mortgages

Usually, closed-end mortgages have a fixed interest rate or variable rate, these mortgages prohibit borrowers from using the collateral used for the mortgage to secure an additional loan. Quite a number of restrictions are imposed by closed-end mortgages, they include;

  • A borrower cannot use collateral that has been previously used for another loan in a closed-end mortgage.
  • A borrower that is 10 years into a 20-year closed-end mortgage and has repaid half of the debt cannot seek additional financing or equity loan without seeking the consent of the lender or pay an extra brokerage fee.
  • No other lender can claim the collateral used in a closed-end mortgage.
  • A mortgagor whose first and primary mortgage is open-ended can secure a closed-end mortgage as a second mortgage.

Reference for “Closed-End Mortgage”

https://homeguides.sfgate.com/closed-end-mortgage-2795.html

https://www.investopedia.com › Personal Finance › Mortgages

https://www.mortgage101.com/article/closed-end-mortgage

www.businessdictionary.com/definition/closed-end-mortgage.html

https://financial-dictionary.thefreedictionary.com/closed-end+mortgage

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