A step down requires the payment of a set percentage of the outstanding amount of the loan. That percentage declines as the loan ages. While a typical step down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, a soft step down starts at a lower rate and declines less quickly. While a step down might have terms that equate to 5-4-3-2-1, a soft step down might be 3-2-2-1-1.
In commercial real estate loans, a prepayment penalty is a fee charged to borrower if they attempt to repay their loan early. When a lender issues a loan, they typically want to lock in their profit for a certain amount of time, so the prepayment penalty is a way to compensate them for their financial loss if the loan is paid off early.
Generally, this is a straightforward calculation based on the remaining balance. It is called a "step-down" penalty because the amount gets smaller the longer the loan is in place.For example, a typical step-down might be 5 % of the outstanding balance in the first year, 4 % in the second year, 3 % in the third year, and so on.
Yield maintenance is a prepayment penalty on an existing commercial mortgage. It acts as a guarantee for the commercial property lender who made the original commercial mortgage, anticipating a set return over the full term of the loan. Unlike other prepayment penalties, yield maintenance covers the entire cost of the original lending agreement, compensating the lender fully for the prepayment of the borrowed funds.