The quick read: Swap breakage is the market value of your interest rate swap on the day you terminate it, and it can run in either direction. If rates have risen since you fixed, the swap is usually worth money to you, not to the bank. Treasury's daily par yield curve put the 5-year yield at 4.40% on August 3, 2026 and 4.94% on October 20, 2026, so a borrower who swapped a floating bank loan to fixed in early August is likely holding an asset, while one who fixed on October 5, when the 5-year stood at 5.06%, may owe a small payment. Before you refinance or sell, read your hedge agreement to see whether it pays that value back to you, and get the termination quote in writing.
For a real estate investor, breakage is a line in the sale or refinance math, next to the loan's own prepayment terms. A gain can fund part of the new loan's costs; a loss can wipe out the benefit of moving. Treasury yields show only the direction of the move: swap rates themselves are not published on a source we can cite, so every dollar figure below is an illustrative assumption, not a quote.
What is a swapped fixed rate on a commercial bank loan?
A swapped fixed rate is a floating-rate bank loan paired with a separate interest rate swap in which you pay the bank a fixed rate and receive the floating index back, so the two floating legs cancel and you are left paying the swap's fixed rate plus the loan's credit spread for as long as both contracts stay in place.
The CFI Team's explainer on interest rate swaps (published March 23, 2020) describes a swap as a derivative in which two parties exchange one stream of future interest payments for another based on a notional principal amount, usually fixed for floating. It says SOFR is now the most widely used benchmark for the floating leg of U.S. dollar swaps, and that only the net difference in payments changes hands; the notional is never exchanged.
The Federal Reserve's Trading and Capital-Markets Activities Manual (section 4325.1, February 1998) adds the vocabulary you will see in your documents. The fixed-rate payer has bought the swap, or is long it. Swaps are usually executed under a master agreement whose standard terms cover, among other things, termination events and the methods of determining damages in case of default or early termination. That master agreement, plus the confirmation for your trade, is where your breakage rules live, not the loan note.
The OCC's Comptroller's Handbook on commercial real estate lending (version 2.0, March 2022) notes that borrowers can hedge their interest rate risk by using interest rate derivatives. On a conventional bank loan with a swap, that hedge is a second contract, and paying off the loan does not end it by itself.
Why does swap breakage cut both ways?
Swap breakage cuts both ways because terminating the swap settles all of its remaining payments at today's market rate, so if market rates now sit above your fixed rate, replacing your side of the trade costs the bank more and the value is yours, and if they sit below it, you owe the difference.
CFI states the rule in one line: if rates rise, the floating-rate receiver gains, and if rates fall, the fixed-rate receiver comes out ahead. A borrower who swapped to fixed receives floating, so rising rates work in the borrower's favour.
The Fed manual walks through what happens at exit. A counterparty can unwind a swap by reversal, assignment or buy-back, which it also calls close-out or cancellation. Buy-backs usually involve a payment based on the swap's mark-to-market value at the time. In the manual's example, a party paying 10 percent fixed on $10 million with one year left, when one-year rates are 8 percent, pays about $185,000 to terminate: the 2-point difference on $10 million, discounted at 8 percent.
Breakage direction by rate move since your trade date, illustrative $10 million swap with four years left (our arithmetic, simplified annual discounting):
| What to check | Rates rose 50 basis points | Rates unchanged | Rates fell 50 basis points |
|---|---|---|---|
| What to check Swap value to the borrower | Rates rose 50 basis points Positive (an asset) | Rates unchanged Near zero | Rates fell 50 basis points Negative (a liability) |
| What to check Who pays at termination | Rates rose 50 basis points Bank owes the borrower, if your documents provide for it | Rates unchanged Little either way, before dealer costs | Rates fell 50 basis points Borrower owes the bank |
| What to check Rough size before dealer costs | Rates rose 50 basis points About $177,000 | Rates unchanged Near zero | Rates fell 50 basis points About $181,000 |
| What to check What to ask for | Rates rose 50 basis points A written termination quote and confirmation the gain is paid or credited | Rates unchanged The bid-offer and any fees in the quote | Rates fell 50 basis points The quote, the method, and whether a new hedge can absorb it |
The rough sizes are 50 basis points of the $10 million notional, $50,000 a year, discounted over four years at about 5.1% and 4.1% respectively. Real quotes add the dealer's bid-offer spread and other adjustments, so treat the table as a sense of scale.
Whether a gain actually reaches you is a document question, and we found no source we can cite that states a market norm. Read the confirmation and the master agreement's early-termination terms before you assume a credit at closing.
How do you estimate the direction of breakage from your trade date?
You estimate the direction of breakage by comparing the Treasury yield for your swap's remaining term on the trade date with the same yield today, because the Fed manual notes that swap fixed rates are conventionally quoted as a spread over the Treasury rate, so a large Treasury move usually points the swap value the same way.
Treasury's daily par yield curve gives the dated tape:
5-year Treasury par yield, August 3, 2026 (Treasury): 4.40%
5-year Treasury par yield, October 5, 2026 (Treasury): 5.06%
5-year Treasury par yield, October 15, 2026 (Treasury): 4.91%
5-year Treasury par yield, October 20, 2026 (Treasury): 4.94%
2-year Treasury par yield, August 3 and October 20, 2026 (Treasury): 4.25% and 4.79%
10-year Treasury par yield, August 3 and October 20, 2026 (Treasury): 4.70% and 5.12%
The Fed's minutes of its September 15-16, 2026 meeting, posted October 7, 2026, report that nominal yields increased around 35 basis points across the 2- to 10-year segment over the intermeeting period, and that the Committee raised its target range to 3-3/4 to 4 percent. The minutes describe a move that has already happened; they are not a forecast of where your swap will sit on the day you close.
Read the tape against your own trade date. A swap fixed in early August 2026 sits against a 5-year yield 54 basis points higher on October 20 (our arithmetic), which points to a gain. A swap fixed on October 5 sits 12 basis points lower, which points to a small loss. The swap spread itself moves too, and it is not on a page we can cite, so the Treasury move shows direction, never the dollar amount.
Use the remaining term, not the original one. A five-year swap with two years left behaves like a two-year swap, and the 2-year yield moved 54 basis points over the same window.
What else is due when you pay off a swapped bank loan early?
When you pay off a swapped bank loan early, the swap termination is one of several costs, because the loan note can carry its own prepayment premium, the termination quote carries the dealer's bid-offer and other adjustments, and legal or processing fees may apply to either contract, so add every line before comparing the payoff with keeping the loan.
Line items to put on one page:
Loan prepayment premium: set by the note, separate from the swap
Swap termination value: the mark-to-market amount, positive or negative
Dealer costs: the bid-offer spread and any adjustments built into the quote
Fees: legal, processing and any release costs on both contracts
New loan costs: origination, third-party reports and any new hedge
The loan's own exit terms are a separate calculation. Our guide on how commercial loan prepayment penalties work covers step-downs, yield maintenance and defeasance on the note itself, and our method for testing a refinance prepayment break-even shows how to weigh an exit cost against the savings from moving.
You may not have to terminate at all. The Fed manual describes assignment, where a new counterparty takes over the position and a payment for the swap's net present value changes hands, and notes that assignment requires the other counterparty's agreement. If the refinance stays with the same bank, ask whether the swap can carry over to the new loan. The OCC handbook's warning on construction facilities applies here too: hedges are harder to fit when the balance changes, so match any new swap's notional to the new loan's schedule.
How do you refinance a swapped bank loan without losing the hedge value?
You refinance a swapped bank loan without losing the hedge value by getting a written termination quote first, then putting the payoff, the swap value and the new loan request in front of several lenders together, so every offer is measured on the same net cost. Our first recommendation, as publisher, is a brokerage.
1. A commercial mortgage brokerage: YieldStack, our pick as the publisher of this guide. YieldStack is an AI-native commercial mortgage brokerage that arranges financing for commercial real estate investors. Its software matches the deal against 20,000+ loan programs and compares the options. Human brokers structure the request around the swap position, negotiate on the borrower's side and carry the deal toward closing. YieldStack reports a median first offer in under an hour, from an institutional lender. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing.
2. Your current bank. It holds both contracts and can quote the termination and a new loan at once, but it sits on the other side of the swap and its own quote is the only one you see.
3. Calling lenders one at a time. It works, but each new lender prices the deal without the swap value in view, which makes the net costs hard to compare.
Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed.
What to send:
- The loan note's prepayment terms and the current payoff statement
- The swap confirmation and the master agreement's termination terms
- A written termination quote with its date, method and dealer costs
- The trade date, notional, fixed rate and remaining term of the swap
- Property rent roll and trailing operating statement
- The new loan you want and whether you plan to hedge it
When the package is ready, send the refinance for review.
The bottom line
Swap breakage is the swap's market value on the day you terminate it, and it can be a gain. The 5-year Treasury rose from 4.40% on August 3, 2026 to 4.94% on October 20, 2026, so a borrower who fixed in early August is probably in the money. Get a written termination quote, confirm whether your documents pay the gain back, and add the loan's own prepayment terms before you decide.