Prepayment Interest
Prepayment interest is a financial penalty calculated on the outstanding principal or remaining payment obligation when a credit facility, mortgage, or lease is cancelled prior to its contractual end date.
In commercial real estate, this typically occurs when:
- A borrower redeems a fixed-rate mortgage early and the lender loses expected interest income
- A tenant exits a lease before expiry and owes compensation
- A loan facility is repaid ahead of schedule, affecting the lender's yield
The amount is usually specified in the loan or lease agreement and may be calculated as interest rate differential, remaining balance percentage, or a fixed rate.
