Money & Finance › Commercial real estate lending › Swap loans: a floating bank loan fixed with an interest-rate swap
Swap breakage: the cost (or refund) of unwinding a swap early
· Concept
Fact, law or dataA rule, statute, definition or measured number.
The payment due when a swap is ended early: the owner pays if rates have fallen since signing and is paid if they have risen.
See it on the Money & Finance map →How it works
The swap is valued at today's rates. Example: an owner fixed a 4% swap rate on $10 million; with five years left, a new five-year swap costs 3%. The owner is overpaying 1% a year, about $100,000, for five years, so ending it costs the present value, roughly $460,000. If the market rate were 5% instead, the bank would owe the owner about $430,000. Banks build a markup into the quote; CFTC rules require dealers to disclose the mid-market value.
Why it matters
It can decide whether a sale or refinance pencils out. Because it cuts both ways, a swap can become an asset worth collecting, not just a cost.
Facts, rules and data
ISDA close-out terms, CFTC business-conduct rules requiring mid-market marks, and bank termination statements; the math is standard present-value discounting.
Debates and risks
How large banks' markups on termination quotes are, and how far borrowers can negotiate them, varies and is rarely disclosed.
Connections (3)
▸Swap breakage: the cost (or refund) of unwinding a swap early is the exit cost, or refund, of Swap loans: a floating bank loan fixed with an interest-rate swapFact, law or data
The connection
In a swap loan the loan itself may be prepayable, but the swap is a separate contract that runs to its end date. Paying the loan off early means terminating the swap at its market value. Because the two are cross-defaulted and share the deed of trust, the bank collects any amount owed from the sale or refinance proceeds.
When and why
In US community and regional bank lending, where swap loans are common on 5–10-year commercial mortgages.
How we know
Loan agreements, ISDA confirmations and bank termination statements, plus CFTC rules requiring dealers to disclose swap valuations to customers.
Debates and risks
Borrowers often do not know the cost until they request a payoff quote, and banks' markups inside it vary.
▸Swap breakage: the cost (or refund) of unwinding a swap early acts as a hidden form of Prepayment penalties: step-down, yield maintenance, defeasanceMainstream view
The connection
A swap loan may advertise no prepayment penalty, but breaking the swap works like yield maintenance: both pay the lender's loss when rates have fallen, using the same present-value math. The difference: yield maintenance never pays the borrower, while swap breakage pays the owner when rates have risen.
When and why
In US bank loans fixed with swaps, sold widely to smaller borrowers from the 2000s on.
How solid is the link?
ISDA termination and yield-maintenance formulas are the same discounting calculation; the UK regulator's 2012–16 review flagged poorly explained swap exit costs.
Debates and risks
How well banks explained exit costs to small borrowers was the core issue in the UK review; whether US borrowers were similarly misled is debated.
▸Swap breakage: the cost (or refund) of unwinding a swap early often turned into refunds after 2022 hikes in The federal funds rateFact, law or data
The connection
Owners who fixed swaps at 1–2% in 2020–21 saw market swap rates jump to about 4–5% after the Fed's 2022–23 hikes. Their swaps became assets: ending them early meant the bank paid the owner, sometimes hundreds of thousands of dollars on a mid-size loan. Swaps fixed near 2023's highs moved the other way as rates fell in 2024–25.
When and why
Across US bank swap loans; many owners who sold or refinanced in 2022–24 collected termination payments.
How we know
The Fed's rate history, published swap-rate data, and bank termination statements showing payments to borrowers.
Debates and risks
Whether to break a valuable swap or keep it to the end depends on where rates go next, which no one can forecast.