Yield maintenance is a prepayment penalty calculated as the present value of the lender's lost interest income from the early payoff date through the loan's maturity. Common on bank, life co , and some agency loans. The penalty is typically zero in the open prepayment window at the end of term.
How is yield maintenance calculated?
Take the loan's remaining payment schedule. Discount each remaining payment at a current Treasury rate of matched maturity (e.g., the 5-year Treasury for a payment 5 years out). Sum those present values and subtract the loan's outstanding balance. The difference is the yield maintenance premium.
Some yield maintenance formulas include a floor (e.g., 1% of loan balance) regardless of rate movement. Some are calculated using a Treasury rate plus a spread to better match where the lender could re-deploy capital.
Yield maintenance vs. defeasance: which is more expensive?
When current rates are below the loan rate, both are expensive but defeasance is generally moderately more expensive because the borrower bears Treasury bid/ask, securities intermediary fees, and the precision of buying actual Treasuries (vs. a present-value calculation). When rates are above the loan rate, defeasance can be cheaper or even produce positive economics; yield maintenance never goes below the floor.
Sources
- Treasury Constant Maturity Series (DGS5, DGS10) · Federal Reserve Bank of St. Louis (FRED) · weekly
- Daily Treasury Par Yield Curve Rates · U.S. Department of the Treasury · daily
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1