A fixed-rate payer (e.g. a swap dealer) of a cancellable swap pays more interest than he receives because he has the right to terminate the swap after a certain time if rates fall. What are the reasons the swap dealer trades this kind of product? Does he expect interest rate will rise in the future and then the received cash flows will be more than the fixed rate payment? And the right to terminate the deal is just a kind of "insurance" for him to stop loss if the rates do not move up or even fall? How can he make money from trading this kind of deals?
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You can see a cancellable swap as the combination of a vanilla swap and an option to enter a swap in the opposite direction. Depending on who can cancel the swap (dealer, counterpart or both), the swap dealer is buying or selling the volatility to the counterpart.
If the swap dealer is the fixed rate payer and only him can terminate the deal (which seems to be your example), he is actually buying volatility and will pay a higher fixed rate than a vanilla swap, while having a protection if interests were to fall.
