What Is Yield Maintenance?
Yield maintenance is a type of prepayment penalty like defeasance or step-down prepayment. It ensures lenders receive a yield from the prepayment of a loan similar to the yield if the loan was paid through maturity. Yield maintenance clauses typically require that a borrower pays 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 prepayment penalty.
Yield Maintenance Calculator
How to Calculate Yield Maintenance
The formula for yield maintenance is:
Yield Maintenance = Present Value of Remaining Mortgage Payments x (Interest Rate - Treasury Yield*)
*Treasury yield = The current Treasury rate on new debt with the same maturity date as the original loan.
Yield Maintenance vs. Other Prepayment Penalties
In multifamily finance, prepayment risk is often handled through one of three methods: yield maintenance, step-down prepayment, or defeasance. Each method compensates lenders via different means should a borrower pay a loan off before it matures.
Defeasance is more complex than yield maintenance. It involves swapping the loan's collateral with interest-yielding financial instruments of relative value.
Step-down prepayment requires a borrower to pay a percent of a loan's outstanding balance if paid early. The percentage gradually steps down over a fixed period of time.
