- Prepayment is the early repayment of a loan or other debt obligation.
- In the context of securitisation, prepayment refers to the early repayment of the underlying assets that are being securitised.
- Prepayment can occur for a variety of reasons, including:
- The borrower refinances their loan at a lower interest rate.
- The borrower sells their property.
- The borrower defaults on their loan.
Prepayment can have a significant impact on the cash flow of a securitisation.
- If there is a lot of prepayment, the investors in the securitisation may receive their payments earlier than expected.
- This can be beneficial for the investors, as they will have access to their money sooner.
- However, it can also be challenging for the securitisation, as it may not have enough cash flow to make payments to the investors.
There are a number of ways to manage prepayment risk in securitisation.
- One way is to use a prepayment model to estimate the amount of prepayment that is likely to occur.
- Another way is to use a prepayment penalty to discourage borrowers from prepaying their loans.
- Finally, it is also possible to use a waterfall structure to ensure that the investors in the securitisation are paid in full, even if there is a lot of prepayment.
Overall, prepayment is an important risk factor in securitisation. It is important to manage prepayment risk in order to protect the interests of the investors in the securitisation.