Commercial mortgage prepayment penalties, with the math
The cheaper the rate, the harder it usually is to leave. Before you compare two quotes, find the prepayment clause in each, because a loan that’s 25 bps cheaper can cost hundreds of thousands of dollars more if you sell or refinance early.
The three structures
Yield maintenance. You pay the lender roughly the interest it loses by getting its money back early. Life companies use it; so do Fannie Mae and Freddie Mac before a loan is securitized. Freddie Mac’s April 2026 term sheet, for example, applies yield maintenance until the loan is securitized, then a two-year lockout, then defeasance, with no premium in the final 90 days.
Defeasance. You don’t pay the loan off at all. You buy a portfolio of Treasury securities whose payments match every remaining loan payment, and those securities replace the property as the lender’s collateral. CMBS loans use it because the trust holding them is a REMIC, and the federal REMIC rules (26 CFR 1.860G-2(a)(8)) only allow a lien to be released for government securities if the release is not within two years of the trust’s startup day.
Step-down. A fixed percentage of the balance that falls over time, written as 5-4-3-2-1 for a five-year schedule: 5% in year one, 4% in year two, and so on. Banks commonly offer it. Freddie Mac’s Conventional Small sheet lists step-down as an option at additional cost.
A worked example of yield maintenance
You have a $5,000,000 balance at 6.50% with five years left, and the five-year Treasury is at 4.50% when you want to sell.
- The lender loses 2.00% a year on $5,000,000: $100,000 a year, or $8,333 a month for 60 months.
- Discount those 60 payments back at 4.50% and the premium is about $447,000, or almost 9% of the balance.
(The real formula in your documents will use the loan’s amortization schedule and a specific Treasury reference, but this gets you within a few percent.)
Now flip it. If Treasuries were at 6.75% when you sold, above your note rate, the lender loses nothing by getting repaid, and most yield maintenance clauses fall to whatever minimum premium the documents set. That asymmetry is the whole game: yield maintenance and defeasance are expensive when rates have fallen and cheap when they’ve risen.
Step-down in the same example
On a 5-4-3-2-1 schedule, paying off $5,000,000 in year three costs 3%, or $150,000, no matter where rates are. You pay for that certainty with a higher rate or a lower loan amount, so price it against the chance you’ll actually leave early.
Questions to ask before you sign
- When does the prepayment period end, and is there an open window at the end of the term? Freddie’s is the final 90 days.
- Is the loan assumable by a buyer, and for what fee? An assumable loan can be worth more than a cheap payoff.
- For defeasance: who picks the defeasance consultant and the successor borrower, and what do they charge?
The lender pages cover each lender type’s usual terms, and the rates page shows what each one costs today.
Questions people ask
How is yield maintenance calculated?
Roughly, it's the present value of the interest the lender loses by being repaid early. Take the gap between your note rate and the Treasury yield matching your remaining term, apply it to your balance for each remaining month, and discount those amounts back at the Treasury yield. Loan documents add details such as a minimum premium.
When is defeasance cheaper than paying off the loan?
When Treasury yields have risen above your note rate since closing. The bonds that replace your payments then cost less than face value, so the total defeasance cost can come in near or even below the loan balance once fees are added. When yields have fallen, it costs much more.