A fully amortising loan is a loan that is repaid in full over the course of its term. This means that the borrower makes regular payments that include both interest and principal, and the loan balance is zero at the end of the term.
Fully amortising loans are often used in securitisation because they are relatively predictable. The borrower's payments are known in advance, so the investors who buy the securitised loan can be confident about the amount of income they will receive.
One application of fully amortising loans in securitisation is to create mortgage-backed securities (MBS). MBS are a type of asset-backed security that is backed by a pool of mortgages. The mortgages in the pool must be fully amortising loans, so that the investors in the MBS know that they will receive regular payments of interest and principal.
Another application of fully amortising loans in securitisation is to create asset-backed commercial paper (ABCP). ABCP is a type of short-term debt security that is backed by a pool of assets, such as receivables or loans. The assets in the pool must be fully amortising loans, so that the investors in the ABCP know that they will receive regular payments of interest and principal.
Here are some other applications of fully amortising loans in securitisation:
- To create student loan ABS
- To create auto loan ABS
- To create credit card ABS
- To provide finance for businesses
Fully amortising loans can be a useful tool for both borrowers and investors. For borrowers, they offer the advantage of knowing that they will eventually be debt-free. For investors, they offer the advantage of predictable income.