Deferred interest is interest that is not paid out to investors immediately but is instead paid out later, typically at the end of the securitisation. Deferred interest is typically used to cover the costs of setting up the securitisation or to provide a buffer against losses in the early years of the securitisation.
Deferred interest is a common feature in securitisations, and it is typically disclosed in the securitisation's offering documents.
Here are some examples of deferred interest in securitisation:
- A securitisation of mortgages might have deferred interest for the first five years of the securitisation. This means that investors would not receive any interest payments for the first five years, but they would receive a lump sum payment of interest at the end of the five years.
- A securitisation of credit cards might have deferred interest for the first two years of the securitisation. This means that investors would not receive any interest payments for the first two years, but they would receive a lump sum payment of interest at the end of the two years.
Deferred interest can be a good way to reduce the upfront costs of a securitisation, but it can also increase the risk for investors. If there are any losses in the early years of the securitisation, investors may not receive any interest payments until the end of the securitisation.