This refers to the possibility that a borrower may not be able to refinance an existing loan in order to repay their debt. This can create potential problems for both the borrower and the lender.
Where have you heard about refinancing risk?
You may have come across this concept in relation to a mortgage. A homeowner may have assumed they'd be able to remortgage their property before their monthly payments increased on a certain date, but then not been able to.
What you need to know about refinancing risk.
In the context of borrowers, there may be many factors that increase the borrower's refinancing risk. For example, interest rates may rise considerably between the start of the initial mortgage and the planned refinancing date. The property price could also fall, potentially leading to negative equity for the homeowner. If a borrower is unable to refinance on their loan, this could technically lead to insolvency. It also creates issues for the lender if there is a risk of a default on the loan.
Find out more about refinancing risk.
Interest rate risesmay increase the refinancing risk for borrowers.
