Overview

A yield maintenance clause protects a lender’s expected return when a borrower pays off a loan early. These clauses are most common in commercial real‑estate and other large, fixed‑rate loans where lenders priced in long-term interest income. For borrowers, a yield maintenance requirement can convert a seemingly attractive refinance or sale into a costly transaction if you don’t plan for the prepayment amount.

How does yield maintenance work (in plain terms)?

  • The lender determines the remaining scheduled cash flows (interest and principal) under the loan.
  • The lender then identifies a comparable market yield — often a U.S. Treasury rate for the remaining term (sometimes plus a small spread) — and discounts those cash flows to present value.
  • The borrower pays the difference between the loan’s remaining balance (or remaining scheduled payments) discounted at the loan yield and the present value discounted at the market (Treasury) yield.

That difference is meant to “make whole” the lender for lost future interest. The exact method (which payments are used, which Treasury curve applies, whether fees are added) is defined in the loan documents.

Simple example (illustrative only)

Suppose a $1,000,000 fixed‑rate loan has 10 years left at 5% and current comparable Treasury yields for 10 years are 3%. The lender will calculate present values using the 3% Treasury curve. If the present value of the remaining 5% cash flows (discounted at 3%) is higher than the loan balance discounted at 5%, the borrower must pay the lender the difference. Lenders and servicers use precise formulas and market curves; always request a written payoff quote — it’s the only exact number.

When does a yield maintenance clause apply?

  • Full or partial prepayment, including sale‑related payoffs.
  • Refinancing with another loan (many refinances trigger payoff language).
  • Sometimes transfers of ownership (check the assignment/transfer provisions).

Some loan documents carve out exceptions (small prepayments, allowed defeasance, or lender consents). Always read the payoff paragraph and definitions in your note and loan agreement.

Common types and related terms

  • Yield maintenance (make‑whole) — uses present‑value math, often tied to U.S. Treasury yields.
  • Prepayment penalty — a broader category that can include fixed fees, sliding scales, or yield maintenance. See our guide on prepayment penalties for borrowers for a deeper comparison: Prepayment Penalty.
  • Defeasance — a specialized remedy (common in CMBS loans) where the borrower substitutes Treasury securities for the loan collateral to replicate cash flows. Defeasance can be an alternative to paying a cash make‑whole but is often costly and complex.

Who is affected?

Borrowers of commercial mortgages, large‑balance fixed‑rate business loans, and CMBS‑backed loans are the most likely to encounter yield maintenance. Residential mortgages rarely use pure yield maintenance; they more often use simple prepayment penalties or no penalty at all.

Practical strategies to reduce or avoid the cost

  • Negotiate before closing: request a capped make‑whole, a short step‑down period, or a right to prepay after a defined seasoning period.
  • Ask for clarity on the discount curve: many borrowers can reduce surprise costs by specifying (or understanding) whether the lender will use Treasury yields, swap rates, or another index.
  • Consider defeasance only if documented as an option and after comparing total costs — it can be practical for large loans but expensive for smaller ones.
  • Time prepayments: if market rates rise toward the loan rate, the make‑whole decreases; conversely, lower market rates usually increase the penalty.
  • Get multiple payoff quotes and include the make‑whole calculation in your sale or refinance proforma.

In my practice I’ve seen borrowers assume a payoff will equal the outstanding principal and be surprised by a six‑figure make‑whole on large commercial loans. Always obtain the servicer’s written payoff statement before finalizing a sale or refinance.

How to calculate (what to ask the servicer)

  1. Ask for the written payoff quote that shows the make‑whole calculation line by line.
  2. Confirm the market curve used (term, source, effective date) and any added spreads or fees.
  3. Request the present‑value math or an auditor‑friendly export — servicers should provide the inputs.

Because formulas vary, rely on the servicer’s quote rather than back‑of‑the‑envelope math when making transaction decisions.

Negotiation tips

  • Offer compensating terms (higher app fee, limited recourse) in exchange for a weaker yield‑maintenance provision.
  • Seek a step‑down (the make‑whole falls after a certain date) or a short no‑penalty window (e.g., after year 5).
  • For refinancing, negotiate a partial release or tightly defined transfer triggers so sales of portions of a property don’t automatically cause large payouts.

Common mistakes borrowers make

  • Not reading the exact payoff language.
  • Assuming yield maintenance equals a flat percentage of the outstanding balance.
  • Failing to request a current payoff quote early in negotiations.
  • Overlooking alternative solutions (defeasance, lender consent, or negotiated buyout).

FAQs

Q: Can I negotiate a yield maintenance clause?
A: Yes. Lenders often trade flexibility in prepayment terms for pricing, covenants, or guarantees. Ask your lender early — the clause is negotiable at the term sheet stage.

Q: Will refinancing always trigger yield maintenance?
A: Usually refinancing triggers the prepayment language unless the loan permits refinancing without penalty. Always verify the loan’s payoff and assignment sections and get a written payoff quote.

Q: How can I confirm the exact amount I’d owe?
A: Request a written payoff statement from the loan servicer dated close to your intended payoff date. That statement is the official amount lenders will accept.

Further reading

Authoritative sources

Professional disclaimer

This content is educational and does not constitute legal or financial advice. Loan documents vary; consult your lender, loan servicer, and a qualified attorney or financial advisor for guidance tailored to your situation.