Yield maintenance is a type of prepayment penalty that enables lenders to receive a similar yield from the prepayment of a loan than they would have received through the completion of scheduled payments on the loan. Yield maintenance clauses specifically require that if a borrower is to prepay a loan, they are required to also pay the difference between the interest rate on the loan and the standing market interest rate on the prepaid capital up to the loan’s maturity date as a penalty. In other words, the purpose of yield maintenance is to compensate investors or lenders for the loss of their future interest income that occurs when a borrower pays a loan off early. For more information, please see Yield Maintenance Calculator.

Yield maintenance is a clause in commercial mortgages that ensures a lender receives the same yield on a loan paid off early. It charges a yield maintenance prepayment penalty fee when the mortgage is paid off, which is calculated as the present value of the remaining mortgage payments, multiplied by the difference between the existing loan’s interest rate and the yield on a new Treasury note (with a term equivalent to the remaining loan term).

For more information, please visit Defeasance or Yield Maintenance: Which Is Better? and Yield Maintenance Calculator.

The main benefit of yield maintenance in commercial mortgages is the lower capital requirements compared to defeasance. Yield maintenance can be handled with a simple (although not insignificant) payment as a one-time penalty, which leaves capital available for other uses, such as renovating a property or acquiring another building. Another advantage is its simplicity compared to defeasance. Once the calculations and payment are accepted by the lender, that’s it.

For more information, please see Defeasance or Yield Maintenance: Which Is Better? and Yield Maintenance Calculator.

The biggest downside of yield maintenance occurs if this option is exercised in an environment where interest rates are falling. If a borrower plans to refinance at a lower interest rate, for example, the cost of yield maintenance may be greater than just continuing to make payments on the existing loan. As a result, the penalty could be far more expensive than if a loan had any one of a number of other prepayment penalties.

Another drawback is that yield maintenance requires a one-time payment as a penalty, which can be significant. This leaves less capital available for other uses, such as renovating a property or acquiring another building.

The alternatives to yield maintenance in commercial mortgages include a declining balance prepayment penalty, a flat fee prepayment penalty, and a step-down prepayment penalty. A declining balance prepayment penalty is a penalty that decreases over time, while a flat fee prepayment penalty is a one-time fee. A step-down prepayment penalty is a penalty that decreases after a certain period of time.

For more information, please see this article and this calculator.

You can calculate yield maintenance in commercial mortgages using the formula:

Yield Maintenance = Present Value of Remaining Mortgage Payments * (Interest Rate - Treasury Rate)

Or, you can use this Yield Maintenance Calculator to assess whether this might be a financially favorable option for your transaction.