Yield Maintenance

Yield maintenance is a prepayment penalty formula that compensates the lender for lost interest income if a loan is paid off early, calculated as the present value of the difference between the loan's note rate and a current benchmark rate (typically a Treasury yield) over the remaining term. Unlike defeasance, the borrower simply pays a cash penalty rather than substituting collateral, making it simpler to execute but often just as costly.

Formula: Yield Maintenance ≈ Present Value of (Note Rate − Benchmark Yield) × Remaining Balance, discounted over the remaining loan term

Yield maintenance penalties are designed to make the lender financially indifferent to early prepayment by ensuring they receive the same total economic return they would have earned had the loan run to full maturity. Because the penalty is calculated against the spread between the loan's fixed rate and current market rates, it moves inversely with interest rates: prepaying when rates have fallen since origination triggers a large penalty, while prepaying when rates have risen can result in a minimal or even zero penalty (most yield maintenance formulas floor the penalty at zero rather than paying the borrower a credit).

Yield maintenance is common on agency multifamily loans, life-company loans, and some bank balance-sheet loans, and is generally simpler to calculate and execute than CMBS-style defeasance, since it doesn't require purchasing and substituting a bond portfolio — the borrower just wires a calculated penalty amount at payoff.

Borrowers should always request a written yield maintenance estimate before committing to prepay or refinance early, since the penalty can be large enough to make an otherwise attractive refinance uneconomical, particularly in falling-rate environments.

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