New Jersey Just Changed the Game on Prepayment Penalties

New Jersey Just Banned Most Commercial Prepayment Penalties

New Jersey has enacted one of the most aggressive prepayment penalty reform laws in the country. Starting in 2026, commercial mortgage borrowers in NJ have new protections that fundamentally change how deals get structured.

What Changed

The new law (S-2776) restricts prepayment penalties on commercial mortgages under $5 million:

No prepayment penalties after 2 years — Lenders cannot charge any prepayment fee or yield maintenance after the first 24 months of the loan term

Capped penalties in Year 1-2 — During the first two years, prepayment penalties are capped at 2% of the outstanding balance

No defeasance requirements — Borrowers cannot be required to purchase treasury securities to replace their loan's cash flow

Applies to all new originations — Any commercial mortgage originated after the effective date in New Jersey

Why This Matters for Investors

More Exit Flexibility

Previously, a 5-year prepay penalty on a bridge or DSCR loan could cost investors tens of thousands of dollars to exit early. If a property appreciates or rates drop, investors were effectively locked in. Now, after 24 months, NJ investors can refinance or sell without penalty.

Changes the Hold Period Math

For fix-and-hold investors, this dramatically changes the calculus. A 30-year DSCR loan with a 5-year step-down prepay used to mean you were committed. Now, you can take the loan, stabilize the property, and refi into better terms after 2 years with zero penalty.

Impact on Lenders

Lenders will likely adjust pricing for NJ properties. Expect slightly higher rates on NJ deals as lenders price in the optionality they're giving borrowers. Some non-QM lenders may add rate premiums of 0.125% to 0.25% for NJ properties.

What About Existing Loans?

The law applies to new originations only. Existing commercial mortgages with prepayment penalties are not affected. However, when those loans are refinanced, the new loan will fall under the new rules.

How Other States Compare

New Jersey joins a small but growing list of states restricting commercial prepayment penalties:

New York — Has consumer protections but limited commercial restrictions

California — Restricts prepay penalties on residential but not commercial

Illinois — Proposed similar legislation in 2025, still pending

New Jersey — Now the most restrictive state for commercial prepayment penalties

What 818 Capital Recommends

If you're investing in New Jersey:

Lock in loans now if you want a lower rate — Pre-law loans may still be priced without the NJ premium

Factor the new rules into your exit strategy — 24-month hold periods just became much more viable

Refi planning gets easier — No more yield maintenance calculations when planning a rate-and-term refi

Compare lender pricing — Some lenders will absorb the change, others will pass it on

This is a significant win for commercial real estate borrowers in New Jersey and sets a precedent that other states may follow.