Prepayment Penalties

Prepayment Penalties can come in many forms, so borrowers are wise to pay close attention to these specifications as they select the right commercial property loans for their needs.

For example, some banks or other lenders may charge a penalty for any prepayment - regardless of the size of the remaining balance or the remaining term of the loan. That said, most lenders will not charge a penalty if the prepayment is less than 10% of the original principal, or may waive the penalty in the event the property is sold or the borrower originates a new loan from the existing lender.

The penalty may take the form of a set fee (of say, $1000) or set percentage (of say, 1% of the original loan amount).

More often, however, the commercial mortgage will include much more complicated fee structures for the penalty that will vary in accordance with time. One example is a 5-4-3-2-1 structure, in which 5% of the remaining balance is the penalty if the loan is prepaid during the first year of its life, 4% in the second year, 3% in the third, and so on. This recognizes that the longer the remaining term of the loan the more value it likely has to the bank and the greater penalty necessary to compensate the lender.