What it means
Investopedia uses the term in two main settings. For bonds, it describes how long a security has traded in the secondary market, and a bond that has traded for over a year without repayment problems is seen as seasoned.
For mortgages, it describes how old the loan or the ownership is. The idea behind bond seasoning is that information takes time to reach the market.
Investopedia says new issues may trade at a discount, which means a higher yield, than comparable seasoned bonds, and the gap closes over months or years. The higher yield is a higher cost of borrowing for the issuer.
Seasoning is also a way of describing reputation. A seasoned bond has a payment history, so investors are more willing to pay for it.
An unseasoned bond has no record yet, so buyers may ask for extra yield to cover the unknown. In mortgages, lenders use seasoning to manage risk.
Investopedia notes that lenders may refuse to refinance or release equity on a loan held for less than a year. A new borrower has not yet proved the ability to pay.
Loan rules give a concrete example. The Fannie Mae Selling Guide has required that an existing first mortgage paid off in a cash-out refinance is at least 12 months old, and that a borrower has been on title for at least six months, with listed exceptions.
Other lenders and countries set different periods, so the current rules need checking. Seasoning does not mean a bond is safe, since a seasoned bond can still default if the issuer weakens and an unseasoned bond from a strong issuer can be sound.
It is a rough signal, not a rating. The term is also used for loan pools, where a pool of loans that has performed for some time can be easier to price than a new pool, since its payment history is known.
In practice
Real-world examples.
Example
A fictional company sells a 10-year bond with a 5% coupon, and the market asks 5.2% for it because it is new. The price is $98.47 per $100, about 1.53% below par. A comparable seasoned bond at 5.0% trades at $100.
Example
The same issuer sold $1,000,000 of face value. The extra 0.2% in yield costs it $2,000 a year in interest compared with a 5.0% rate. That is the price of being unseasoned.
Example
A fictional homeowner bought a house four months ago and wants a cash-out refinance. The lender requires six months on title, so she must wait two more months. Another homeowner has a 14-month-old loan, which meets a 12-month rule for paying off the old loan.
Formula
Calculation
Bond price = Sum of coupons / (1 + y) ^ t + Face / (1 + y) ^ n. With a $5 annual coupon per $100 of face value at y = 5.2% for 10 years, price = $98.47.
Discount = Par - Price. With $100 - $98.47 = $1.53.
Extra annual cost = Face x Yield gap. With $1,000,000 x 0.2% = $2,000.
Months still to wait = Required seasoning - Months already held. With six months required and four held, the wait is 6 - 4 = 2 months.
Worked example of the cost of waiting. A fictional homeowner has a $300,000 mortgage at 6%, which costs $300,000 x 6% / 12 = $1,500 a month in interest. Two more months on the existing loan mean $3,000 of interest paid before a cash-out refinance can proceed, so the benefit of the new loan should be compared with that wait.Case study
Seen in the real world.
This case study is fictional and illustrative. Nadia, 52, in Cape Town, owns rental property and wants to take cash out of one house that she bought five months ago. A broker tells her that most lenders look at how long she has held the property. She finds that the lender wants six months on title.
She also learns that rules vary by lender, loan type and country. She decides to wait one month rather than pay a higher rate through a lender with weaker terms. She uses the time to gather her payment records and valuation. After the six months, she applies.
The lender approves the loan and she compares the cost against her plan. Looking back, Nadia notes that the wait cost her one more month of interest on the existing loan but kept her out of a more expensive product. She files her payment records, valuation and lender terms together, so that the next property she buys has its own seasoning date written beside it. The rule did not stop her plan; it fixed the date on which the plan could start.
Watch out
Common mistakes.
- Assuming a seasoned bond is risk-free when the issuer can still weaken.
- Treating one lender's seasoning rule as universal, when periods differ by lender, loan type and country.
- Ignoring the cost of waiting, such as interest paid while an unseasoned loan cannot be refinanced.
Questions
People also ask.
What does seasoning mean?
It is the time since a bond was issued or a loan was made. Older debt with a clean record is seen as lower risk.
Why do new bonds yield more?
Information takes time to reach the market, so new issues may trade at a discount until a record builds.
How long is a mortgage seasoning period?
It varies by lender and program. One common guide asks for a 12-month-old loan and six months of ownership for a cash-out refinance.
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