Refinancing risk
1.
For any borrower, the risk of adverse pricing or lack of availability of replacement financing, when the current financing reaches the end of its term.
2.
For a mortgage borrower, the risk that the borrower will not be able to refinance an existing mortgage at a future date under favourable terms.
3.
The risk to an investor in mortgage-backed securities (MBS) that an early unscheduled repayment of principal will occur when the underlying mortgages are refinanced by borrowers.
All MBS buyers assume some level of prepayments in their initial yield calculations, but an increase in the level of refinancing (which usually occurs as a result of falling interest rates) means that MBSs mature faster and will have to be reinvested at lower rates.
