Swap Breakage

Swap breakage is the financial cost assessed when an existing interest rate swap is terminated or assigned before its scheduled maturity. In CRE lending this commonly occurs when a borrower prepays or refinances a loan that had been hedged, or when a servicing transfer requires termination. The breakage amount compensates the swap counterparty for the present value of expected future payments lost or gained due to termination, and it can be affected by current market curves, credit spreads, and the remaining tenor of the swap.

When planning a refinance, prepayment, or sale of a property secured by a hedged loan, include swap breakage estimates in the deal pro forma and negotiation with lenders. Brokers and sponsors should request payoff quotes from swap counterparties and understand whether the swap is transferable or requires cash settlement. Lenders and servicers must confirm documentation around assignment rights and breakage allocation, because swap termination costs can materially change the net proceeds available to the borrower and alter the decision to prepay or modify loan terms.

Swap breakage matters because it can create a significant, sometimes surprising, cash liability that alters the economic benefit of refinancing or prepayment. For sponsors and borrowers, failing to account for breakage can erode refinancing proceeds or reduce the attractiveness of a sale. For lenders and servicers, breakage calculations affect loan workout strategies and the timing of modifications. In CMBS structures, swap breakage also interacts with trustee and counterparty agreements, influencing whether swaps are assigned into the trust or settled outside the securitization.