In one sentence
A stretch early in a loan term during which the borrower may not prepay at all, regardless of any willingness to pay a penalty.
The longer version
Lockouts protect the lender's or the securitization's expected yield by removing prepayment as an option rather than pricing it. They are standard in conduit lending, where the loan backs bonds whose investors bought a duration expectation.
After the lockout ends, the loan usually moves into a period of defeasance or yield maintenance, then into an open period before maturity when prepayment is free. Sponsors planning a sale or refinance need the dates modelled at closing, because a lockout can make an otherwise good exit impossible.
Common questions
- What is the difference between a lockout and a prepayment penalty?
- A penalty lets the borrower prepay at a cost. A lockout prohibits prepayment entirely for the stated period, so no amount of money buys the exit.
- What follows a lockout period?
- Usually defeasance or yield maintenance, then an open period, commonly the last few months before maturity, when the loan may be prepaid without cost.
- Can a lockout be waived?
- Rarely in securitized loans, because the constraint protects bondholders rather than the servicer. Balance sheet lenders have more flexibility to negotiate.
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