Yield maintenance is a prepayment penalty on commercial mortgages designed to compensate the lender for the interest income they lose when you pay off a loan early. The penalty equals the present value of the difference between your loan’s interest rate and the current Treasury yield, applied across your remaining payments. The calculation has several moving parts, but once you understand each variable, the math is straightforward.
What Yield Maintenance Actually Does
When you lock in a fixed-rate commercial mortgage, the lender builds a return based on collecting interest payments through the full term. If you prepay, whether to sell the property, refinance at a lower rate, or simply pay down debt, the lender loses that expected income stream. Yield maintenance makes the lender financially whole by charging you a lump sum that replaces the interest they would have earned above current market rates.
The penalty is highest when current interest rates are well below your note rate, because the lender is losing a comparatively valuable income stream. If rates have risen above your note rate, the penalty shrinks or disappears entirely. Most loan documents include a floor, often 1% of the unpaid principal balance (UPB), so you’ll owe at least that minimum even if the formula produces a smaller number. Fannie Mae loan documents, for example, typically require the borrower to pay the greater of 1% of the UPB or the yield maintenance amount.
The Core Formula
The standard yield maintenance formula is:
Yield Maintenance = Present Value of Remaining Payments × (Interest Rate − Treasury Yield)
Here’s what each piece means:
- Present Value of Remaining Payments: The time-value-adjusted sum of the monthly payments left on your loan, discounted using the current Treasury yield.
- Interest Rate (IR): Your loan’s contractual note rate, the fixed annual interest rate in your mortgage documents.
- Treasury Yield (TY): The yield on a U.S. Treasury security with a maturity closest to your loan’s remaining term. This serves as the benchmark for what the lender could earn by reinvesting your payoff in a comparable risk-free instrument.
The present value factor itself is calculated as:
PV Factor = [1 − (1 + r)^(−n/12)] / r
In this formula, “r” is the Treasury yield (expressed as a decimal) and “n” is the number of months remaining on the loan.
Choosing the Right Treasury Yield
The Treasury yield you use should match the time left on your loan as closely as possible. The Federal Reserve publishes daily “constant maturity” Treasury yields at standard intervals: 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year. These are interpolated from the daily yield curve, so a “5-year” constant maturity yield exists even if no single Treasury bond has exactly five years left to maturity.
If your loan has roughly 7 years of payments remaining, you’d use the 7-year Treasury yield. If you have 4 years left, you’d typically use the 3-year or 5-year yield, depending on what your loan documents specify. Many loan agreements define exactly which maturity to use or instruct the servicer to interpolate between two published maturities. Check your note or prepayment rider for this detail before running the numbers yourself.
You can find current Treasury constant maturity rates on the Federal Reserve’s H.15 statistical release, updated every business day.
Step-by-Step Calculation Example
Suppose you have a commercial mortgage with these terms:
- Original loan amount: $2,000,000
- Current unpaid principal balance: $1,800,000
- Note rate: 6.5%
- Remaining term: 60 months (5 years)
- Current 5-year Treasury yield: 4.0%
Step 1: Find the rate difference. Subtract the Treasury yield from your note rate: 6.5% − 4.0% = 2.5%, or 0.025.
Step 2: Calculate the present value factor. Using the PV formula with r = 0.04 and n = 60 months:
PV Factor = [1 − (1 + 0.04)^(−60/12)] / 0.04
That simplifies to [1 − (1.04)^(−5)] / 0.04. Calculate (1.04)^5 = 1.2167, so (1.04)^(−5) = 1/1.2167 = 0.8219. Then: [1 − 0.8219] / 0.04 = 0.1781 / 0.04 = 4.4518.
Step 3: Multiply it all together. Yield Maintenance = $1,800,000 × 4.4518 × 0.025 = approximately $200,331.
Step 4: Check against the floor. The 1% minimum on $1,800,000 would be $18,000. Since $200,331 exceeds the floor, the yield maintenance penalty is roughly $200,331.
This example illustrates why yield maintenance can be so expensive when rates drop significantly below your note rate. A 2.5 percentage point spread over five years of remaining payments on a $1.8 million balance produces a six-figure penalty.
When the Penalty Shrinks or Disappears
The spread between your note rate and the Treasury yield drives the penalty’s size. If rates rise after you close your loan, the Treasury yield could approach or even exceed your note rate, pushing the formula result toward zero. In that scenario, you’d only owe the minimum floor (typically 1% of the unpaid balance). As a practical matter, borrowers looking to refinance or sell are better positioned when market rates are close to or above their existing note rate.
The penalty also decreases naturally as your loan ages. With fewer months remaining, the present value of lost interest shrinks. Most commercial loans have a yield maintenance period that ends a few months before the maturity date, after which you can prepay with no penalty or a nominal fee. Your loan documents will specify the exact “open period,” commonly the last 90 days of the term.
How Yield Maintenance Differs From Defeasance
Defeasance is the other common prepayment mechanism on commercial mortgages, and borrowers often weigh the two when structuring a loan or deciding how to exit one. With defeasance, instead of paying a lump-sum penalty, you purchase a portfolio of Treasury securities that replicates your remaining payment stream and pledge those securities as substitute collateral. The loan stays in place, but the Treasuries service the debt, freeing you from the mortgage.
Defeasance does not include a 1% minimum prepayment fee, which can make it cheaper when the rate environment is unfavorable for yield maintenance. The trade-off is added complexity: defeasance requires a successor borrower entity, a securities intermediary, legal opinions, and accountant sign-off, all of which carry their own fees (often $25,000 to $75,000 in transaction costs). Yield maintenance, by comparison, is a straightforward payoff calculation with no third-party securities purchase involved.
Running Your Own Estimate
To estimate your yield maintenance penalty before contacting your servicer, gather four numbers: your unpaid principal balance, your note rate, the number of months remaining before the open period begins, and the current Treasury constant maturity yield closest to that remaining term. Plug them into the formula above. Keep in mind that your loan documents may define the calculation slightly differently. Some notes use a specific Treasury maturity regardless of remaining term, and some discount each individual monthly payment separately rather than using a single present value factor. The servicer’s calculation is the one that controls, so treat your own number as a ballpark.
If the penalty looks large, remember that it decreases as you get closer to maturity and as market rates rise. Timing a sale or refinance to minimize yield maintenance can save tens or even hundreds of thousands of dollars on a sizable commercial loan.