Definition for : Prepayment penalty

A "prepayment" corresponds to a reimbursement of the Principal owed earlier than initially anticipated. For example, the Asset-Backed Securities (ABS) issued in relation to the Securitisation of a portfolio of mortgage loans will be partly repaid earlier if the borrowers start Refinancing their fixed rate mortgage loans if they are able to lock in more advantageous borrowing terms (E.g. increased debt Leverage, lower Debt service, longer repayment schedule, etc, or a combination thereof). A prepayment can sometimes be authorised without the borrower having to pay any "prepayment penalty", but in most cases some will be charged which may or not compensate the lender for the opportunity loss.
(See Chapter 22 Shares of the Vernimmen)
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