Yield Maintenance

Category: finance

A prepayment penalty clause that ensures the lender receives the same yield they would have earned if the loan ran to maturity.

If a borrower tries to pay off a commercial mortgage early because interest rates dropped, yield maintenance forces them to pay a massive fee. This fee is calculated based on the difference between the loan interest rate and the current market Treasury rate.

Common Examples

• The cost of refinancing our building early was prohibitive due to the yield maintenance clause embedded inside the security contract.
• Yield maintenance protects commercial bond investors from losing their projected income flows when macro interest rates fluctuate downward.