Glossary term
Conditional Prepayment Rate (CPR)
Conditional prepayment rate, or CPR, is an annualized estimate of how quickly mortgage borrowers in a pool are expected to prepay principal.
Updated
Read time
What Is Conditional Prepayment Rate (CPR)?
Conditional prepayment rate, or CPR, is an annualized estimate of how quickly mortgage borrowers in a pool are expected to prepay principal. It is a standard prepayment-speed measure in mortgage-backed security analysis.
CPR helps translate borrower behavior into cash-flow timing. A higher CPR means principal is expected to return faster. A lower CPR means principal is expected to return more slowly.
Key Takeaways
- CPR is an annualized mortgage prepayment-speed measure.
- It estimates the share of remaining principal expected to prepay over a year.
- Higher CPR shortens expected cash flows for mortgage-backed securities.
- CPR is closely related to single monthly mortality, or SMM.
- The measure is an assumption or estimate, not a guarantee.
How CPR Relates to SMM
CPR is annualized, while single monthly mortality expresses the monthly prepayment rate. One common conversion is:
In this expression, CPR is the annualized prepayment rate and SMM is the single monthly mortality rate.
For example, if SMM is 1% for the month, the annualized CPR is about 11.4%. That does not mean exactly 11.4% of every pool will prepay; it translates a monthly speed into an annualized rate.
How to Read CPR
CPR level | General interpretation |
|---|---|
Low CPR | Borrowers are prepaying slowly; cash flows may extend. |
Moderate CPR | Prepayments are occurring but not unusually fast. |
High CPR | Borrowers are prepaying quickly; principal returns faster. |
Why CPR Changes
CPR can rise when mortgage rates fall and borrowers refinance. It can also change with home sales, loan age, seasonality, borrower credit conditions, housing prices, and servicing behavior.
For MBS investors, CPR affects expected life, yield, duration, convexity, and option-adjusted spread. A security can look attractive under one CPR assumption and much less attractive under another.
The interpretation also depends on the pool. A high CPR on a newly originated mortgage pool may signal unusually strong refinancing or turnover, while the same speed on an older seasoned pool may be less surprising. CPR is most useful when compared with the security's history, the market-rate environment, and the model assumptions used in valuation.
Because CPR is annualized, it can make monthly behavior easier to compare across securities. The tradeoff is that annualization can feel more exact than it is. A CPR assumption is still a modeling input that can change quickly when mortgage rates, housing turnover, or refinancing capacity shifts.
For valuation work, the key question is not whether one CPR number is correct forever. It is whether the price still makes sense across a reasonable range of prepayment speeds.
The Bottom Line
Conditional prepayment rate is an annualized estimate of mortgage prepayment speed. It helps investors understand how quickly principal may return, but it depends on borrower behavior and model assumptions.