A real-time prepayment calculation is the exact cost of repaying a commercial real estate loan on a specified date, computed under that loan’s own convention (yield maintenance, defeasance, spread maintenance, make-whole, step-down percentage, swap breakage or a combination by period) using the reference rate the documents specify, observed at the time the documents specify, against the current market curve. Most owners carry an estimate instead: a number from the closing model, a rule of thumb, or last quarter’s figure. The estimate is wrong the day after it is made, because the curve moved, and it is often wrong the day it is made, because the convention was approximated. Each convention has its own inputs, each estimate fails for a specific reason, and a live calculation needs a specific set of things.
The conventions
Lockout. No prepayment permitted. Track the end date.
Flat percentage and step-down schedules. A percentage of the balance that declines by year (5-4-3-2-1 is common on agency floaters and bank loans). The cost is simple; the trap is the step date, which is usually an anniversary of closing, not a calendar year.
Spread maintenance. The present value of the spread over the index for the remaining term, common on floating-rate debt fund loans. Depends on the forward curve.
Yield maintenance. The present value of the difference between the note rate and a reference Treasury yield over the remaining term, discounted at the reference rate, usually with a minimum of 1%. Variations: Treasury flat versus Treasury plus a spread; which Treasury (matching remaining term, interpolated, or a specified tenor); the observation date (the prepayment date, or a lookback of several business days); monthly versus semiannual discounting; whether the balloon is included. See what is yield maintenance.
Make-whole. A yield maintenance variant common on LifeCo and bank loans, often with a Treasury-plus-spread discount rate and no floor, which makes it more expensive in falling-rate markets.
Defeasance. Substitution of government securities for the collateral, standard on CMBS after lockout. The cost is the price of the securities portfolio that replicates remaining debt service, less the balance, plus fees. It moves with the whole curve, not one point. See defeasance.
Swap breakage. On loans hedged with a swap, the swap’s mark-to-market is a prepayment cost (or benefit) added to the loan’s own convention. See interest rate swap.
Aggregate interest. A minimum total interest the lender must receive, so early prepayment pays the shortfall.
Combinations by period. Many loans switch convention: lockout, then yield maintenance, then a step-down, then an open period. The date of the prepayment determines which applies.
Why the estimate is wrong
The lookback. Agency and many bank documents observe the Treasury a set number of business days before prepayment. On a volatile week, the lookback rate and the same-day rate differ by enough to move a large loan’s cost by six figures.
The wrong Treasury. Documents specify the tenor or the interpolation. A model that uses the 10-year for a loan with four years remaining overstates or understates depending on the curve’s shape.
The floor. A 1% minimum often applies; some documents have none. The floor is the answer in high-rate environments and irrelevant in low ones.
The step date. Step-downs keyed to anniversaries are mis-modeled by calendar-year models.
The curve moved. Every convention above except flat percentages is a function of current rates. A quarterly refresh is a quarter stale.
The wrong convention. The closing model was built for the term sheet. The loan agreement may differ, and the amendment two years later may differ again.
What a live calculation requires
- The convention abstracted precisely: type by period, reference rate, tenor rule, lookback, discounting, floor, fees, notice. See the 400-field loan abstract.
- Live market data: the Treasury curve, SOFR and the swap curve, refreshed daily.
- The current balance from the amortization engine, including re-amortization on floaters.
- Projection: the same calculation on any future date, using the forward curve, so a sale in nine months can be priced today.
- Alerts before step-downs and open periods. See loan critical date tracking.
A worked example: one loan, four numbers
A $35 million Fannie Mae fixed-rate loan at 4.25%, closed in 2021, ten-year term, yield maintenance until the last three months, then open. Prepayment planned for a sale closing in six years and four months from origination, leaving three years and eight months remaining. The 10-year Treasury today is 4.77%; the interpolated Treasury for the remaining term is 4.55%.
The closing model’s estimate. Built at closing when Treasuries were 1.5%, it shows yield maintenance of $4.1 million and was never updated.
A generic formula at today’s rates. Note rate minus the 10-year Treasury (4.25% less 4.77%) is negative, so the formula returns the 1% floor: $350,000.
The agency convention. The reference is the Treasury interpolated to the remaining term, observed on the prepayment date less a lookback. At 4.55%, still above the note rate; the floor applies: $350,000. Same answer as the generic formula today, by coincidence.
The same loan if the curve were 150 basis points lower. Interpolated Treasury 3.05%. Note rate less reference: 1.20% on the remaining payments, present valued at the reference rate: about $1.5 million. The generic formula using the 10-year at 3.27% gives about $1.2 million. The lookback on a volatile week could move either by $100,000.
Illustrative example:
| Method | Reference rate | Yield maintenance |
|---|---|---|
| Closing model estimate, never updated | Treasuries at 1.5% in 2021 | $4.1 million |
| Generic formula at today’s rates | 10-year Treasury, 4.77% | 1% floor: $350,000 |
| Agency convention today | Treasury interpolated to the remaining term, 4.55%, with lookback | 1% floor: $350,000 |
| Agency convention, curve 150 basis points lower | Interpolated Treasury, 3.05% | About $1.5 million |
| Generic formula, curve 150 basis points lower | 10-year Treasury, 3.27% | About $1.2 million |
Four numbers for one loan on one date, from $350,000 to $4.1 million, and the sale’s net proceeds depend on which one is in the model. The right one is the one computed under the documents’ convention against today’s curve, refreshed tomorrow.
Portfolio decisions that depend on it
- Hold/sell. The prepayment cost is a transaction cost that changes the answer. See loan-level valuations for investment committee.
- Refinancing timing. Comparing today’s cost with a step-down six months out.
- Defeasance versus assumption. Whether a buyer taking the loan is worth more than paying to exit. See defeasance decisions in portfolio context.
- Maturity wall planning. Which loans can be repaid early and at what cost. See the maturity wall refinancing playbook.
- Hedge unwinds. Swap breakage on a swapped loan. See hedge requirements.
How this looks in LoanBoss
Every prepayment convention (lockout, flat percentage, aggregate interest, spread maintenance, yield maintenance, make-whole, swap breakage and defeasance) is modeled per loan and per period, with the rate lookback the documents specify. Yield maintenance and defeasance are calculated in real time against live rates and can be projected for any future date. Alerts fire before step-downs. A customer’s CFO described prepayment calculators that handle the most complex scenarios in seconds, giving confidence in every number.
Frequently Asked Questions
How different can two conventions be on the same loan?
On a $50 million loan with five years remaining, Treasury-flat yield maintenance versus Treasury-plus-50 make-whole can differ by well over a million dollars, and either can differ from defeasance by a similar amount depending on the curve’s shape.
Should we get a quote from the servicer instead?
Yes, before closing a sale. The live calculation tells you what the quote should be, so you can challenge it.
Can prepayment ever be a benefit?
Swap breakage can be a receipt if rates have risen. Some make-whole formulas produce zero above a rate threshold. The calculation shows it either way.
How often should the number refresh?
Daily. The curve moves daily; the decision may be made any day.
What is the rate lookback in a yield maintenance calculation?
Agency and many bank documents observe the reference Treasury a set number of business days before the prepayment date rather than on it. On a volatile week the lookback rate and the same-day rate differ by enough to move a large loan’s cost by six figures.
Related reading
- Yield maintenance in your portfolio
- Tracking CMBS loans as a borrower
- LifeCo loans
- Interest-only expiry planning
- Floating-rate re-amortization and SOFR tracking
The prepayment number is the most expensive number in the portfolio to get wrong. LoanBoss keeps it live for every loan, every day, on every convention.
Sources
- Fannie Mae and Freddie Mac prepayment and yield maintenance conventions (2026)
- CRE Finance Council, CMBS defeasance standards
- Pensford Capital, yield maintenance and defeasance calculation guides
- Public bank loan agreements, prepayment provisions