Yield maintenance, estimated before the payoff quote.
Yield maintenance is the prepayment premium that compensates a lender for the interest it loses when a fixed-rate loan pays off early. Enter the outstanding balance, the note rate, the current Treasury yield, the months left in the yield maintenance period and any minimum premium to estimate what an early payoff would cost.
- Formula amount
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- Minimum premium
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An estimate using the common formula on a level balance. The loan documents set the actual formula: the Treasury maturity used, whether the discount rate adds a spread, the minimum, and how the period is counted. Use this to size the order of magnitude, then ask the servicer for a payoff quote.
The common formula
When a loan is repaid early, the lender has to reinvest the money. If it can only earn the Treasury yield instead of the note rate, it loses the difference every month until the end of the yield maintenance period. Yield maintenance charges the present value of that loss.
The calculator uses the common version: monthly loss equals the balance times the note rate minus the Treasury yield, divided by 12, discounted at the Treasury yield over the months remaining. The premium is the larger of that amount and the minimum, often 1 percent of the balance. If the Treasury yield is at or above the note rate, there is no loss to recover and only the minimum applies.
A worked example
A $10,000,000 balance at a 6 percent note rate, with the matching Treasury at 4 percent and 60 months left, loses $16,667 of interest a month. Discounted at 4 percent over 60 months, the premium is about $904,984, roughly 9 percent of the balance.
Time and rates both move it. With 24 months left instead of 60, the premium falls to about $383,804. With the Treasury at 5 percent and 60 months left, it is about $441,589. With the Treasury above the note rate, only the $100,000 minimum is due.
| Treasury yield | Months remaining | Estimated premium |
|---|---|---|
| 4.0% | 60 | $904,984 |
| 5.0% | 60 | $441,589 |
| 4.0% | 24 | $383,804 |
| 6.5% | 60 | $100,000 (minimum) |
What the loan documents decide
The note sets the exact formula, and versions differ. Some discount at the Treasury yield plus a spread, which lowers the premium. Some use the Treasury that matches the remaining term, others the one that matches the remaining average life. Some calculate on the scheduled payments of an amortizing loan rather than a level balance, and many end the premium at an open period before maturity. This calculator assumes a level balance and the common formula, so treat the result as an estimate and get the servicer's payoff quote before relying on it.
Securitized loans more often use defeasance instead, and some balance sheet loans use a step-down prepayment schedule, where the premium is a fixed percentage that declines each year.
Why it matters on the next deal
A refinance or sale that triggers yield maintenance has to fund it at closing, so the premium belongs in the sources and uses from the first term sheet. Lenders on the new loan see it in the payoff letter. Check that the premium on the payoff letter matches the one in the closing statement before the loan funds.
Questions lenders ask
- How is yield maintenance calculated?
- Take the difference between the note rate and the matching Treasury yield, apply it to the balance for each month left in the yield maintenance period, and discount those amounts to present value at the Treasury yield. The premium is that amount or the minimum, whichever is larger.
- Why does yield maintenance go up when rates fall?
- A lower Treasury yield widens the gap to the note rate, so the lender loses more interest by reinvesting, and discounting at a lower rate makes the lost interest worth more today.
- Is yield maintenance the same as a prepayment penalty?
- It is one type of prepayment premium. Others include step-down percentages and defeasance. Yield maintenance is the one that moves with interest rates.
- Can yield maintenance be zero?
- The formula amount is zero when the Treasury yield is at or above the note rate, but most loans set a minimum premium, often a percentage of the balance, so prepayment is rarely free until the open period.
- How accurate is a yield maintenance calculator?
- It gives the right order of magnitude. The exact figure depends on the formula in the loan documents and the Treasury yield on the payoff date, so the servicer's payoff quote is the number that counts.
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