What is a pass-through fee? (with photo)

The pass-through rate is always lower than the average interest rate paid by the borrower on the mortgages used to back the security.

The on-lending rate is the amount of interest, commonly referred to as net interest, that the issuer of a mortgage-backed security pays to investors after all costs and fees associated with servicing the investment have been paid. This rate works like the return investors get when they choose to invest in the bonds. The reference to this type of interest rate as a pass-through has to do with the fact that the amount passed on to investors passes from the payments on the underlying mortgages, through the paying agent, and finally to the investor.

It is important to note that the pass-through rate is always lower than the average interest rate paid by the borrower on mortgages used as security for the security. This is because various types of fees are deducted from the interest paid. These fees include general administration fees for carrying out transactions relevant to the securities involved, as well as any type of collateral collection associated with the investment itself. Often these rates are set as percentages of the interest generated, although in some cases the rates are fixed rates that are set out in the terms and conditions governing the issuance of the bonds.

The creation of a securitized asset pool that involves the use of mortgages as collateral for the bonds is not uncommon. Many institutions that underwrite mortgages prepare and issue financial instruments of this type. As long as the economy remains stable, the risk associated with investing in this type of bond arrangement remains low compared to some other investment options, and the realized return as the pass-through rate is highly likely to be considered equitable for the degree of risk involved. .

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In many situations, it is possible to project the amount of return that an investor will obtain from generating the pass-through rate. As with any investment, there is the possibility that unforeseen factors may arise that could influence the actual value of the net interest generated. For example, if mortgages that guarantee the bond have a variable or floating rate rather than a fixed rate, changes in the average interest rate will affect the level of return. For this reason, investors will do well to try to anticipate any interest rate changes over the life of the bond and include them in the projected pass-through rate. This will help the investor determine whether the bond’s return is worth the degree of risk associated with the underlying mortgages.

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