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.