Yield Maintenance Prepayment Penalty Calculator
Planning to refinance or sell a commercial property? Don't let the prepayment penalty surprise you. Estimate the 'Make-Whole' cost by comparing your loan rate against current Treasury yields.
What Is Yield Maintenance?
Yield Maintenance is a prepayment penalty designed to compensate the lender for the interest income they will lose when a commercial loan is paid off early. It ensures that the lender earns the same yield as if the loan had never been prepaid.
Unlike Defeasance, which requires the borrower to purchase a portfolio of government securities to replace the loan's collateral, Yield Maintenance typically involves a straightforward cash payment to the lender. This "Make-Whole" provision protects the lender against reinvestment risk, ensuring they receive the contracted interest rate regardless of early payoff.
Key Components of the Calculation
To accurately estimate your penalty, you must understand the variables that drive the cost.
- Loan Interest Rate: The fixed interest rate stated in your original loan note.
-
Treasury Yield: The benchmark risk-free rate (e.g., the 10-year Treasury) applicable to your loan's remaining term.
Higher Treasury Rate = Lower Penalty
- Spread (Reinvestment Spread): The margin (often expressed in basis points) added to the Treasury yield to define the lender's acceptable reinvestment rate.
-
Remaining Term: The time left (in months or years) until the loan matures. A longer remaining term generally results in a higher potential penalty.
Longer Term = Higher Potential Penalty
How Is the Penalty Calculated?
The calculator estimates the "Present Value" of lost future interest using a simple interest differential method. While lenders may use more complex actuarial tables based on exact amortization schedules, this formula provides a reliable estimate.
Penalty = Balance × Years × (Loan Rate - Reinvestment Rate)
Where:
- Balance = Outstanding loan principal
- Years = Remaining term of the loan
- Loan Rate = Your current contract rate
- Reinvestment Rate = Current Treasury Yield + Spread
How to Use This Calculator
- Gather your loan documents, specifically the Note and Security Agreement.
- Enter the Current Loan Balance and the original Loan Interest Rate.
- Check current Treasury yields (e.g., via Treasury.gov) relevant to your loan's maturity.
- Enter the Spread defined in your prepayment clause (e.g., 150 bps).
- Review the "Penalty as % of Balance" to gauge the financial impact of a refinance or sale.
Understanding Your Results
Your result indicates the cost to exit the loan. Use the guide below to interpret the financial impact.
0% (No Penalty)
Defeasance in-the-money. Market rates are higher than your loan rate. Great time to exit.
1-3% (Low)
Manageable cost. Easily absorbed in refinance closing costs or sale profit.
3-6% (Moderate)
Significant impact. Calculate if equity in the property covers this cost.
6%+ (High)
Major barrier. Payoff might erode all equity. Consider holding the loan or assuming it.
Yield Maintenance vs. Defeasance
| Feature | Yield Maintenance | Defeasance |
|---|---|---|
| Method | Cash payment to lender. | Purchase of Treasury securities. |
| Cost Structure | Fixed formula based on rates. | Cost of securities + fees (can vary daily). |
| Complexity | Often simpler. | Complex process (legal/admin fees). |
Why Rates Change Your Penalty
Key Insight: Inverse Relationship
As Treasury yields RISE, Yield Maintenance penalties FALL. Conversely, when rates drop, refinancing becomes attractive, but the YM penalty spikes to prevent the lender from losing out on the higher yield.
The Federal Reserve's actions on interest rates directly influence Treasury Yields. Since penalties are highest when you most want to refinance (low rate environment), timing is critical.
When to Calculate Yield Maintenance
-
Selling a Property:
Calculate the penalty before listing to determine the minimum acceptable offer price to cover your costs.
-
Refinancing:
Compare the new loan's savings over 5 years vs. the immediate YM penalty cost to ensure the refinance is profitable.
-
Loan Assumption:
Sometimes avoiding the penalty by having a buyer assume the existing loan is financially better than paying it off.
Limitations of This Calculator
Estimation Method
We use simple interest. Real lenders use a "Present Value of Annuity" based on the exact amortization schedule.
Day Count Convention
Some loans use 30/360 (standard bank) vs Actual/360 (commercial). This changes the daily interest accrual.
Treasury Match
Ensure you use the correct Treasury maturity (e.g., compare 5-year loan to 5-year Treasury, not 10-year).
Frequently Asked Questions
References & Sources
- U.S. Department of the Treasury - Source for current yield rates.
- Commercial Real Estate Finance Council (CREFC) - Industry definitions.
- IRS Publication 535 - Guidelines on business expense deductions.
About the Author
Nithya Madhavan
Web developer and data researcher creating accurate, easy-to-use calculators across health, finance, education, and construction and more. Works with subject-matter experts to ensure formulas meet trusted standards like WHO, NIH, and ISO.