Early Repayment of fixed-rate Mortgages - there is no free Lunch
German Mortgage Banks
Download Document| Date Published | 2004 |
| Version | |
| Primary Author | Hans-Joachim Dübel |
| Other Authors | |
| Theme | Mortgage Products |
| Country |
Abstract
Providing consumers with the right of early repayment of fixed-rate mortgages at little or no additional charge has been a long-standing demand of consumer groups in mortgage finance. But, given that investors in pools of fixed-rate mortgages face reinvestment risk for the funds they receive (do not receive) from prepayments, there can be no free lunch. Either the additional risk is reflected through an interest rate markup, which renders mortgage loans considerably more expensive – the situation in the US fixed-rate market. Or, to avoid higher rates, the lender adopts call protection strategies, e.g. by charging an indemnity – the situation in the European markets.