Posted in Finance, Accounting and Economics Terms, Total Reads: 1130
Definition: Refinancing Risk
Let us understand first what does refinancing risk means, it means that for a mortgage borrower , the risk that he/she will not be able to refinance a debt in future date. So there is a huge risk involved in the person defaulting on the loan amount. If a borrower cannot refinance his existing loan and he doesn’t have enough funds to clear his loan and pay to his lenders due to his liquidity problems, the person is then termed to be technically insolvent.
Even though the person has more assets than liabilities and but the person is unable to raise liquid funds to pay to the creditors. This condition may even lead to bankruptcy as the person doesn’t have enough liquid cash even though his net worth is positive.
This risk of the person unable to refinance his debt and which could lead to his bankruptcy is called refinancing risk. Most large corporations and banks could also face this risk, as these institutions constantly borrow and repay loans also. The refinancing risk increase in the period of increased interest rates as the borrower at many times would not be able to payback the interest on the loan he has taken from the financial institution.