Yield Maintenance
A prepayment formula that makes a lender whole for lost interest if a loan is paid off early. The borrower pays the difference between the loan's note rate and a comparable Treasury yield over the remaining term, discounted to present value.
Yield maintenance is a prepayment penalty designed to guarantee the lender the same yield it would have earned had the loan run to maturity. It shows up most often on fixed-rate DSCR loans, portfolio rental loans, and commercial mortgages where the lender — or the bond buyers behind a securitization — counted on a specific stream of interest income.
When an investor prepays (usually to sell the property or refinance into a cheaper rate), the lender loses that future interest. Yield maintenance forces the borrower to pay the present value of the lost interest, so the lender can reinvest the payoff in a Treasury of similar maturity and still hit the original yield.
The formula in plain terms
YM premium = remaining principal × (note rate − comparable Treasury yield) × present-value factor for the remaining term
The penalty grows when market rates fall (the lender would have to reinvest at a lower yield) and shrinks toward zero when market rates rise (the lender can reinvest at the same or better yield, so there's little lost income to make up).
A worked example
An investor has a $500,000 loan at a 7.5% note rate with 3 years remaining. They want to sell. The comparable 3-year Treasury yields 4.5%.
Rate differential = 7.5% − 4.5% = 3.0%
Approx. annual lost interest = 500,000 × 3.0% = $15,000/yr
Over ~3 years, discounted to present value ≈ $40,000–$43,000
The borrower would owe roughly $40k+ on top of the principal payoff. Most contracts also set a floor — the penalty is never less than a small percentage (often 1%) of the balance.
How it's used in investor lending
Yield maintenance is the lender's tool for rate-risk protection. For the borrower it's a major exit cost: a deal that pencils out on paper can be wrecked by a five-figure prepay penalty if you sell into a falling-rate market. Smart investors compare yield maintenance against a simpler prepayment penalty (like a step-down) and against defeasance before signing a term sheet. Long-term holders care less; flippers and short-hold investors should push for a shorter lockout period or a softer step-down structure instead.
This is general information, not legal or financial advice — always model the exact penalty clause in your loan documents.
Frequently asked questions
Is yield maintenance worse than a regular prepayment penalty?
It can be much larger when interest rates have fallen since you closed, because the formula reimburses the lender for all the interest it would lose by reinvesting at today's lower rates. When rates have risen, yield maintenance often costs little more than the contract floor (commonly 1% of the balance). A flat step-down penalty is more predictable but isn't tied to market moves.
When does the yield maintenance penalty go to zero?
It approaches zero as you near maturity (less remaining interest to protect) and when comparable Treasury yields rise to or above your note rate (the lender can reinvest at the same yield). Most loans also drop the penalty entirely during an open prepayment window in the final months before maturity.
Can I avoid yield maintenance?
Negotiate the structure up front. Options include a shorter lockout, a declining step-down penalty instead of yield maintenance, or choosing a shorter fixed term that matches your hold period. On larger commercial loans, defeasance is sometimes the only alternative offered.