What is residential mortgage-backed security?

This refers to a collection of mortgage loans pooled by banks and building societies. The money received from customers' mortgage repayments are grouped together and packaged up into assets that investors can buy.

Where have you heard about residential mortgage-backed security?

Often referred to as RMBSs, you may have heard of them in the context of investors being offered the change to purchase these securities.

What you need to know about residential mortgage-backed security.

There are several advantages and disadvantages to investing in residential mortgaged-backed securities. One benefit is that potential investors often have a degree of control over the structure of the asset, allowing them to tailor the risk and cashflow to personal preference. Two potentials issues faced by investors are prepayment risk and credit risk. The former refers to a situation where a homeowner repays a mortgage before its maturity date, meaning less money from interest will be available in a RMBS pool. The latter is when the current interest rate falls below that of a mortgage loan, meaning a homeowner may decide to remortgage.

Find out more about residential mortgage-backed security.

An RMBS may be used as a foundation for instruments such as collateralised mortgage obligations (CMOs).