Lockout Period
A window early in a loan's life during which the borrower is prohibited from prepaying the loan at all — even with a penalty. Common on commercial and securitized investor loans to protect the lender's expected yield.
A lockout period is the stretch of time at the start of a loan when prepayment is completely forbidden — you cannot pay the loan off early at any price. It's the strictest form of prepayment protection, sitting one notch above a prepayment penalty (where you can prepay but must pay a fee) and yield maintenance or defeasance (where you compensate the lender).
Why lenders impose it
Lenders — and the bond investors behind securitized loans — want certainty that they'll collect interest for a guaranteed minimum window. A lockout removes the option to refinance away the moment rates drop, locking in the loan's early-year yield. It's most common on fixed-rate commercial mortgages, CMBS debt, and some longer-term DSCR loans.
How it fits a typical prepay structure
A loan's prepayment terms often stack like this:
Years 1–2: Lockout (no prepay allowed)
Years 3–4: Yield maintenance or defeasance
Final months: Open window (prepay free)
A worked example
An investor closes a 5-year DSCR loan with a 2-year lockout. Eighteen months in, rates fall a full point and they'd love to refinance into a cheaper loan. They can't — the lockout blocks any payoff until month 25. Even selling the property is complicated: the buyer would typically have to assume the loan (if assumable) because it can't be paid off. Only after the lockout expires can the investor refinance, and even then a declining penalty may apply.
How it's used in investor lending
For borrowers, the lockout is a hold-period commitment. If your strategy is buy-and-hold for 5–10 years, a 2-year lockout is irrelevant. If you might sell or refinance soon — a value-add play, a BRRRR refi, or a fix-and-flip pivot — a lockout can trap you. Always confirm the lockout length on your term sheet and weigh it against more flexible products like hard money loans, which usually have short or no lockouts. Note that a lockout is distinct from a prepayment penalty: one blocks payoff entirely, the other just prices it.
This is general information, not legal or financial advice.
Frequently asked questions
Can I sell my property during a lockout period?
You can sell the property, but you generally cannot pay off the loan during a true lockout. In practice that means the buyer must assume the existing loan (if it's assumable) or you wait until the lockout expires to refinance or pay off. This makes lockouts a real constraint for investors who might exit early.
How long are lockout periods?
On investor and commercial loans, lockouts commonly run 1 to 3 years, after which a yield-maintenance, defeasance, or step-down penalty applies until an open window near maturity. Short-term products like hard money typically have little or no lockout.
Is a lockout the same as a prepayment penalty?
No. A lockout prohibits prepayment entirely for a set period. A prepayment penalty allows you to prepay but charges a fee. Many loans combine them: a lockout first, then a penalty phase, then an open period.