Difference between revisions of "Refinancing Incentive"
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== Definition == | == Definition == | ||
| − | '''Refinancing Incentive''' is the economic incentive of a [[Borrower]] to [[Refinance]] an existing borrowing with a new contract. The refinancing incentive is a key driver of [[Prepayment Risk]] | + | '''Refinancing Incentive''' is the economic incentive of a [[Borrower]] to [[Refinance]] an existing borrowing with a new contract. The refinancing incentive is a key driver of [[Prepayment Risk]]. |
| + | |||
| + | == Measurement == | ||
| + | The measurement of the refinancing incentive invariably focuses on the net present value ''savings'' obtained when refinancing a loan with an existing applicable interest rate <math>C_0</math> to a new loan at the current rate <math>C_t</math>. This difference measures whether the expected value of prepaying the loan/mortgage exceeds the value of not prepaying. | ||
| + | |||
| + | == Issues and Challenges == | ||
| + | * A strong refinancing incentive does not necessarily translate into actual [[Prepayment]]. | ||
| + | * A refinancing incentive as defined above does indicate whether prepayment is optimal | ||
| + | |||
[[Category:Prepayment Risk]] | [[Category:Prepayment Risk]] | ||
Latest revision as of 16:31, 1 December 2022
Definition
Refinancing Incentive is the economic incentive of a Borrower to Refinance an existing borrowing with a new contract. The refinancing incentive is a key driver of Prepayment Risk.
Measurement
The measurement of the refinancing incentive invariably focuses on the net present value savings obtained when refinancing a loan with an existing applicable interest rate 
to a new loan at the current rate 
. This difference measures whether the expected value of prepaying the loan/mortgage exceeds the value of not prepaying.
Issues and Challenges
- A strong refinancing incentive does not necessarily translate into actual Prepayment.
- A refinancing incentive as defined above does indicate whether prepayment is optimal
