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.