Droplock Security


DEFINITION of 'Droplock Security'

A security that is issued with a variable or floating interest rate, but that converts to a fixed-rate security if its reference rate reaches or falls below a predetermined level. The conversion from a floating-rate to a fixed-rate security can be viewed as an embedded option for a cap and a floor on the fixed income security. Usually, these features are used to protect borrowers from high interest rates.

BREAKING DOWN 'Droplock Security'

In the U.K., the term "droplock mortgage" refers to variable interest rate mortgages that can be converted to a fixed rate by the borrower without incurring a penalty or paying additional fees. Droplock mortgages are attractive when interest rates are perceived to be heading higher.

  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Conversion Option

    A clause associated with some adjustable-rate mortgages that ...
  3. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  4. Mortgage Rate Lock

    An agreement between a borrower and a lender that allows the ...
  5. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  6. Yield Curve Risk

    The risk of experiencing an adverse shift in market interest ...
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