What Is Yield Maintenance?
Yield maintenance — a type of prepayment penalty like defeasance or step-down prepayment — ensures that lenders receive a yield from the prepayment of a loan similar to what would have been received 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 Payments on the Mortgage x (Interest Rate - Treasury Yield*)
*Treasury yield = The current treasury interest rate on new debt with the same maturity date as the original loan.
Yield Maintenance vs. Alternative Prepayment Penalties
In multifamily finance, prepayment risk is often mitigated through one of three methods: yield maintenance, step-down prepayment, or defeasance. While each method was designed to compensate lenders in the event of a borrower paying a loan off earlier than expected, they accomplish this goal through different methods.
Defeasance differs from yield maintenance in that it is a much more complex process that involves swapping the collateral of the loan with interest-yielding financial instruments of relative value. Step-down prepayment, on the other hand, takes the form of a payment schedule that requires a borrower pay a premium that gradually reduces over a fixed time period.
