| Detail | Explanation |
|---|---|
| Purpose | Keeps the lender's expected yield whole after early repayment |
| Main inputs | Outstanding balance, note rate, reinvestment Treasury yield, remaining term |
| Common on | Life company, agency multifamily, and balance-sheet fixed-rate loans |
| Usual floor | A minimum premium stated in the note |
How is yield maintenance calculated?
The note defines the formula, and details differ by lender. A common version takes the difference between the note rate and the yield on a Treasury security maturing near the loan's maturity or open date, applies it to the balance being prepaid for each remaining period, and discounts those amounts back to today at that Treasury yield. The premium is the greater of that result and the stated minimum. Treasury yields by maturity are published daily by the U.S. Treasury.
Premium = greater of (minimum premium) or (present value of [balance × (note rate minus Treasury yield)] over the remaining term)
Worked example: a yield maintenance premium
In this hypothetical example, a borrower prepays an $8,000,000 balance on a 5.50% loan with 4 years left. The matching Treasury yield is 3.75%, so the lender loses 1.75% a year, or $140,000 a year. Discounting 4 annual payments of $140,000 at 3.75% gives a premium of about $511,194 before any minimum applies. The note sets a minimum premium of 1% of the balance, which equals $80,000 here. If the Treasury yield had been 5.75%, above the note rate, the formula result would be zero and the borrower would pay the $80,000 minimum premium instead. Real formulas usually run monthly, so actual figures differ.
| Input | Value |
|---|---|
| Balance prepaid | $8,000,000 |
| Note rate | 5.50% |
| Treasury yield | 3.75% |
| Remaining term | 4 years |
| Annual rate differential | $140,000 |
| Present value premium | $511,194 |
| Minimum premium at 1% | $80,000 |
What drives the cost up or down?
- Lower Treasury yields since closing raise the premium
- More time left before maturity or the open period raises the premium
- A larger balance raises the premium in proportion
- A higher note rate relative to current Treasuries raises the premium
- Some notes discount at the Treasury yield plus a spread, which lowers the premium
How is yield maintenance different from defeasance?
Yield maintenance repays the loan with a cash premium. Defeasance leaves the loan in place and swaps the property for a portfolio of government securities. The yield maintenance vs defeasance guide compares the 2 side by side, and the prepayment penalty page covers step-down schedules and open periods. To weigh a premium against the savings from a new loan, compare payments in the commercial mortgage calculator.
Reading the clause before you sign
The formula wording matters. Check which Treasury benchmark applies, whether the discount rate adds a spread, how the minimum is defined, when the open period starts, and whether a partial prepayment or a casualty payoff is exempt. Formulas vary by lender and loan, so have counsel or an advisor model the clause against the likely exit date. Capital Partners compares prepayment terms across lenders on permanent loans and refinances, and you can submit a deal to review them for a property.
Sources
Common questions
Is yield maintenance the same as a prepayment penalty?
It is one type of prepayment premium. Other types include fixed step-down percentages and defeasance, and each is calculated differently.
Does yield maintenance go away if rates rise?
The formula amount can fall to zero when Treasury yields exceed the note rate, but most notes still charge a stated minimum premium.
Which Treasury yield is used for yield maintenance?
The note specifies it, usually a Treasury security or interpolated yield with a maturity close to the loan's maturity or open prepayment date.
Can I negotiate yield maintenance?
Before closing, borrowers can sometimes negotiate a shorter yield maintenance period, a longer open window, a spread added to the discount rate, or a step-down structure instead. After closing, changes are rare.
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