How is the yield-maintenance cost on an agency multifamily loan calculated?

Formula and worked examples

Worked example: $20M outstanding at 6.0% with 5 years remaining. Current 5-year Treasury yield at 4.0%. Rate differential = 200 bps. PV factor for 5 years at 4.0% discount = approximately 4.5. Penalty = $20M × 2.0% × 4.5 = $1.8M. Plus floor adjustments per the loan-document formula.

Variables that move the cost: outstanding principal (declines as loan amortizes), remaining term (declines as loan ages), loan coupon (fixed at origination), current matched-maturity Treasury yield (varies daily). YM cost is highest at the beginning of the loan term in declining-rate environments and lowest near maturity or in rising-rate environments.

Comparison to defeasance: agency YM is typically modestly less expensive than CMBS defeasance on identical economic terms because agency does not require the Treasury portfolio purchase mechanics, the YM penalty is paid in cash to the lender. Saves the consultant and structural complexity costs.

Open window: agency multifamily loans typically have a 90-day open window at the back end during which prepayment is allowed without YM. Plan refi to fund within the window when possible.

Modeling for refi decisions: use the loan-document formula (or a YM calculator tool) to estimate the penalty at multiple Treasury-yield scenarios and at multiple refi-execution dates. The penalty number is sensitive to the exact prepay date relative to the schedule of payments; a few weeks of timing can change the penalty by tens of thousands of dollars.