DEFINITION of Coterminous
Coterminous refers to a supplemental loan with a maturity that is the same as the senior, or original, loan. Coterminous is most often used to describe mortgage loans, such as those for residential and commercial borrowers.
BREAKING DOWN Coterminous
While a supplemental loan can have a maturity date that occurs after that of the original loan (often called "non-coterminous"), most second mortgage lenders or mezzanine lenders prefer to have both loans mature on the same date. This way, the borrower can choose to refinance both loans into one larger one, preferably with the same lender.
How Coterminous Loans Are Structured
Lenders who offer coterminous loans may have a number of limits and restrictions. This can include a stipulation that the same lender must service any existing prior mortgages the borrower has. The lender might not allow a coterminous, supplemental loan to be taken out shortly after an original loan has been approved. The borrower may have to wait at least one year into the term of the original loan before seeking this additional financing. Lenders might require that the original loan must have a minimum amount of time left – five years, for example – on its term before a coterminous loan is approved.
A coterminous mortgage may have a minimum amount that must be borrowed. On coterminous commercial mortgages, there could also be stipulations about the property itself. For example, there maybe be occupancy requirements that the borrower must meet and maintain in order to qualify for a supplemental mortgage. The building might need to be 85% physically occupied for at least 90 days before the closing of the mortgage. The collection of replacement reserves on the coterminous supplemental mortgage might be waived; however, the replacement reserves in the original mortgage would continue to be collected. A new appraisal of the property may be required as well as a new title insurance policy.
This type of financing could appeal to borrowers because it allows offers a way for multiple mortgages have a single date when the property is expected to be free and clear. It is possible that borrowers consolidate their loans by refinancing when interest rates become more favorable to reduce their overall debt obligation. By having the same settlement date, borrowers may have an easier time determining if refinancing the original and coterminous loans will provide a significant savings. For the lender, offering a coterminous supplemental loan may represent less default risk than a non-coterminous mezzanine mortgage because of the shared maturity date.