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What's the meaning of Prepayment risk?

帮考网校2020-10-12 15:36:22
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Prepayment risk refers to the risk that borrowers will pay off their loans earlier than expected, which can be a problem for lenders. When borrowers prepay their loans, lenders lose out on the interest payments they would have received had the loan been held to maturity. This can be particularly problematic for lenders who have invested in mortgage-backed securities, as prepayments can disrupt the expected cash flows and returns on those investments. Prepayment risk is often associated with adjustable-rate mortgages, as borrowers may choose to refinance their loans when interest rates fall, leading to prepayments.
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