In securitisation, an advance rate is the percentage of the value of the
collateral that a securitisation issuer is willing to lend to a
borrower. The advance rate is used to determine the maximum loan amount that a borrower can receive from a securitisation. The
advance rate is typically set by the securitisation issuer and is based on a number of factors, including the type of collateral, the creditworthiness of the borrower, and the market conditions.
The higher the advance rate, the more money the borrower can borrow, but the greater the risk to the securitisation issuer. For example, if a securitisation issuer is willing to lend up to 80% of the value of a borrower's collateral, then the advance rate is 80%. This means that if the borrower has collateral worth $100,000, then the securitisation issuer will lend up to $80,000. The advance rate is an important factor to consider when securitising assets.
A higher advance rate can make securitisation more attractive to borrowers, but it can also increase the risk to the securitisation issuer. Securitisation issuers should carefully consider the risks and benefits of different advance rates before making a decision.
Here are some of the factors that can affect the advance rate:
- The type of collateral: The type of collateral that is being securitised can affect the advance rate. For example, securitisations of residential mortgages typically have a higher advance rate than securitisations of commercial mortgages.
- The creditworthiness of the borrower: The creditworthiness of the borrower can also affect the advance rate. Borrowers with a good credit history will typically be able to obtain a higher advance rate than borrowers with a poor credit history.
-The market conditions: The market conditions can also affect the advance rate. In times of economic uncertainty, securitisation issuers may be more reluctant to lend money, which can lead to a lower advance rate.