What Is Yield Maintenance?

Yield maintenance is a type of prepayment penalty — like defeasance and step-down prepayment — 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 typically occurs when a loan is paid off early.

Yield Maintenance Calculator

Yield Maintenance Calculation

Yield maintenance premium calculations follow this formula:

Yield Maintenance = Present Value of Remaining Payments on the Mortgage x (Interest Rate - Treasury Yield)

What Do I Use for the Treasury Yield?

The Treasury yield is the current Treasury interest rate with the same maturity as your loan. Check the table below for live rates.

Key Yield Maintenance Considerations

Lenders and Yield Maintenance 

A yield maintenance clause is often a common feature for commercial financing of $1 million or more. Yield maintenance is arguably one of the best prepayment penalty options for lenders to protect themselves against lost revenue. Yield maintenance also helps lenders sell commercial loans for securitization — besides the immediate benefits to the lender, yield maintenance clauses typically also guarantee a set percentage of return to the purchasers of the repackaged debt.

Borrowers and Yield Maintenance

Yield maintenance is particularly desirable for borrowers when interest rates are expected to rise — more so when the clause doesn’t specifically stipulate a minimum prepayment fee. The reason for this benefit is that yield maintenance in such a scenario allows a borrower to repay a loan at a present value discount. In addition, the inclusion of a yield maintenance clause typically denotes that the loan is assumable, which can be a highly desirable feature to some borrowers.

Yield Maintenance vs. Alternative Prepayment Penalties

In commercial real estate, lenders typically mitigate prepayment risk through one of three mechanisms: yield maintenance, defeasance, or step-down prepayment. While each of these prepayment penalties is designed to mitigate lender loss, they do so through different methods:

• Yield maintenance - A simple payment of a penalty fee including the difference between the interest rate on the loan and the standing market rate up to the maturity date of the loan. 

• Defeasance - A somewhat complex process that involves a strategical swap of the collateral of the loan with interest-yielding financial instruments of similar value. 

• Graduated or step-down prepayment - A straightforward payment schedule wherein the borrower pays a premium that gradually reduces over a fixed period of time.