What does It Mean if a Loan is Coterminous?

A coterminous loan is a type of loan that is carried in tandem with some type of senior debt. One of the distinguishing characteristics of this type of loan is that the maturity date is the same as the primary or senior loan. Coterminous loans are common in a number of situations, including first and second mortgage loans carried on the same property.

Not every second mortgage is automatically considered a coterminous loan. Should the maturity or settlement date on that secondary debt be different from the maturity date of the primary mortgage, then the loan is considered a supplemental rather than coterminous loan. While both loan arrangements are considered subordinated debt, lenders and borrowers often like the idea of having one maturity date that applies to coterminous loans, since this often helps to simplify the accounting process.

Lenders tend to favor a coterminous approach to loans since it enhances the potential of debtors choosing to refinance both loans at some point, combing the remaining balances into a single debt obligation. If both the senior debt and the secondary debt have the same maturity date, the process of calculating the total payoff required to settle the two loans is much simpler. That in turn makes it easier to determine the amount of the new combined loan.

Debtors may be attracted to this arrangement for the simplicity of determining when the property will be free and clear of any type of claims by the lender. In addition, changes in interest rates may prompt the debtor to refinance the two loans into a single loan, usually to save money and reduce the overall obligation to the lender. Determining if refinancing is a good idea is easier if both loans have the same settlement date, allowing the debtor to identify how much of a savings would be generated. While it is possible to refinance a primary and supplemental loan into a single combined debt obligation, the presence of a coterminous loan makes the calculation easier to perform.

Many lenders who hold mortgages on commercial or residential property will often recommend a coterminous loan approach if the property owner wishes to secure a second mortgage. In some cases, lenders may offer incentives to motivate owners to go with single maturity date for both debts. When this is the case, the benefits of structuring that second mortgage as a coterminous loan are enhanced, making the option that much more appealing to the homeowner.