Prepay penalty that compensates lender for lost interest.
Yield Maintenance (YM) is a prepayment penalty structured to compensate a lender for the interest income it would have earned if the loan had run to maturity. The penalty equals the present value of the spread between the loan's contract rate and a current Treasury rate, applied over the remaining loan term.
Yield maintenance is the standard prepay structure on agency multifamily loans, most life-company commercial perm, and some conduit loans. The mechanic: the lender priced the loan assuming a specific spread over Treasuries. If the borrower prepays, that spread is lost on the remaining term. The penalty makes the lender whole by paying the present value of those lost payments upfront.
The math is enormously sensitive to rate environment. If the loan rate is 6% and current matching Treasury yields are 5%, the spread is 1% — applied over remaining principal and term, the YM cost is modest. If Treasuries have dropped to 3.5% and the spread is now 2.5%, YM can balloon to 15–25% of loan balance. The same loan, the same prepayment timing — the cost is completely driven by where Treasuries are when you exit.
For agency multifamily loans, YM applies for most of the term, with a final 3–6 month "open prepay" window before maturity. This means a 10-year agency loan has YM in years 1–9.5, then a few months at the end where the borrower can prepay at par. Most borrowers refinance during that window when it's economic, accepting YM cost only when rate-and-term arbitrage makes early payoff attractive.
YM is borrower-friendly in some scenarios: in a rising-rate environment, current Treasuries may exceed the original loan rate, in which case YM is zero or even pays the borrower a credit. CMBS and other deeply structured loans don't typically allow this credit (the floor is zero), but the principle holds — YM is a hedge for the lender against rate decline, not a flat penalty.
| Original loan amount | $8,000,000 |
| Loan rate | 6.50% |
| Remaining principal at year 5 | $6,840,000 |
| Remaining term | 5 years |
| Scenario A: Treasury rate at year 5 = 5.50% | |
| Spread × remaining principal × years × DF | ~$310,000 (3.8% of balance) |
| Scenario B: Treasury rate at year 5 = 3.25% | |
| Spread × remaining principal × years × DF | ~$1,025,000 (12.5% of balance) |
| Scenario C: Treasury rate at year 5 = 7.00% | |
| Treasury > loan rate → YM = $0 | (zero — no spread to compensate for) |
A prepayment penalty calculated as the present value of the interest income the lender would have earned if the loan had run to maturity. Common on agency multifamily and CMBS loans.
Yes — if current Treasury rates equal or exceed the original loan rate, there's no spread to compensate for and YM is zero. This is common in rising-rate environments.
Yield maintenance is a cash payment. Defeasance replaces the loan's collateral with a Treasury portfolio that produces the same cash flow. Defeasance is more complex, more expensive to execute, but lets the property be released from the loan.
The Treasury floor in the YM formula drops, so the spread between loan rate and current Treasury widens. Wider spread × remaining principal × remaining years = bigger penalty.
Typically in the final 3–6 months before maturity (the "open prepay" or "open window"). This lets borrowers refinance at the end of the loan without penalty.
Matrix structures bridge debt that anticipates your agency or life-company perm takeout — including realistic models of YM cost at various rate environments.
