Nobody reads the prepayment section of an agency loan term sheet the day they close. They read the rate, the leverage, and the fact that it's non-recourse. The prepayment penalty is the paragraph everyone skips — and it's the one that decides what you can actually do with the building three years later.
Agency debt is the cheapest long-term money in multifamily. Fannie Mae and Freddie Mac lend to stabilized apartment buildings — five units and up — at rates that sit well under what a bank or bridge lender charges, at up to 80% loan-to-value, non-recourse, with DSCR minimums around 1.25x. The trade for that price is time: 45 to 60 days to close, a thick underwriting package, and a loan that does not want to let you leave early.
That's the point. An agency loan is built around yield — the lender, and the bond market behind them, expects that stream of payments to run to maturity. So when you prepay early, you owe them back the economics they counted on. That's yield maintenance.
Here's how it actually works. The penalty is the greater of two numbers: one percent of the loan balance, or the present value of your remaining payments multiplied by the difference between your note rate and the Treasury rate of the same duration. If you borrowed at 6% and the comparable Treasury is now 4%, you're paying the present value of that two-point spread across every remaining payment. On a ten-year loan prepaid in year three, that number is real money.
The second trap is subtler: the penalty moves with interest rates, and not in your favor. Rates fall — the Treasury rate drops, the spread widens, and your prepayment penalty grows. The exact moment you'd most like to refinance into cheaper money is the moment the exit fee is at its biggest. Rates rise — the penalty shrinks, but nobody's refinancing at higher rates, and selling into a rising-rate market has its own math. Yield maintenance is designed so that the loan only releases you when it's indifferent about you.
So when I model an agency execution, the prepayment math gets built into the business plan on day one, not discovered at a sale meeting in year five. Know your lockout period. Know your yield maintenance end date — many loans step down to a flat penalty or an open window before maturity, and a sale timed around that window can save six figures. And know that the loan is assumable with lender approval, which means a buyer can take it over and you can sidestep the penalty entirely if the rate is attractive to them.
Cheap debt is only cheap if the whole loan fits the plan. Agency debt fits a hold: stable cash flow, a defined timeline, and a disposition planned around the loan's calendar. If your business plan says you might sell in year three, price the exit on the term sheet before you sign it. The rate is the headline. The prepayment clause is the fine print that runs the show.
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