- Prepayment rate is a measure of the amount of principal that is prepaid on a securitisation's underlying assets in a given period.
- It is expressed as a percentage of the outstanding principal balance at the beginning of the period.
- For example, a prepayment rate of 5% would mean that 5% of the outstanding principal balance was prepaid in a given period.
The prepayment rate is an important factor in securitisation because it can affect the cash flow of the 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 factors that can affect the prepayment rate, including:
- Interest rates: If interest rates fall, borrowers may be more likely to prepay their loans, as they can refinance their loans at a lower interest rate.
- The terms of the loan: Loans with prepayment penalties are less likely to be prepaid, as borrowers will have to pay a fee if they prepay their loans early.
- The economic environment: If the economy is strong, borrowers may be more likely to prepay their loans, as they may be able to sell their properties for a profit.
The prepayment rate can be used to calculate the expected cash flow of a securitisation.
- This can help investors to assess the risk of the securitisation and to determine whether or not it is a good investment.
The prepayment rate can also be used to manage the risk of a securitisation.
- For example, if the prepayment rate is expected to be high, the issuer may want to include a prepayment penalty in the securitisation to discourage borrowers from prepaying their loans early.