Yield maintenance is a prepayment clause in commercial real estate loans that requires a borrower who prepays a loan to "make good" on the lender's lost interest income. Unlike a standard prepayment penalty which is often a fixed percentage of the outstanding balance, yield maintenance aims to provide the lender with the exact economic yield they would have received if the loan had remained outstanding for its full term. This protects the lender from reinvesting principal at a lower prevailing interest rate.
When a borrower prepays a loan, especially if interest rates have fallen since the loan was originated, the lender faces a risk. The principal received from the prepayment will need to be reinvested at the current, lower market rates, leading to a reduction in expected interest income. A yield maintenance clause compensates for this potential shortfall.
How the Calculator Works:
The Yield Maintenance Calculator helps estimate the prepayment premium. It calculates the difference in interest income the lender would have earned if the loan continued at its original terms versus reinvesting the prepaid principal at current market rates.
Yield Maintenance Premium Calculation:
1. Calculate Annual Interest Loss: (Current Portfolio Yield - Reinvestment Rate) * Portfolio Value / 100
2. Calculate Target Interest Income: Target Yield * Portfolio Value / 100
3. Calculate Actual Reinvestment Income: Reinvestment Rate * Portfolio Value / 100
4. Difference in Income: Target Interest Income - Actual Reinvestment Income
5. Yield Maintenance Premium: (Difference in Income) + Yield Maintenance Costs
Current Portfolio Yield (%): The interest rate of the loan being prepaid.
Target Yield (%): The hypothetical yield the lender would have earned if the loan continued to maturity, typically based on U.S. Treasury rates for the remaining term plus a spread. For simplicity in this calculator, we use a "Target Yield" input.
Portfolio Value ($): The outstanding principal balance of the loan at the time of prepayment.
Reinvestment Rate (%): The estimated interest rate at which the lender can reinvest the prepaid principal in similar risk investments. This is often based on government bond yields for the remaining term.
Yield Maintenance Costs ($): Any administrative, legal, or other direct costs associated with processing the prepayment and calculating the premium.
Use Cases:
Yield maintenance clauses are common in large commercial mortgages, particularly for properties like office buildings, hotels, and retail centers. Borrowers considering prepayment should use this calculator to:
Estimate the potential cost of prepayment.
Negotiate a more favorable prepayment option with the lender.
Make informed decisions about refinancing or selling the property.
It's important to note that the actual yield maintenance calculation can be complex, often involving specific indices (like Treasury yields) and agreed-upon spreads. This calculator provides an approximation based on the inputs provided. Always consult your loan documents and a financial advisor for precise figures.
function calculateYieldMaintenance() {
var currentYield = parseFloat(document.getElementById("currentYield").value);
var targetYield = parseFloat(document.getElementById("targetYield").value);
var portfolioValue = parseFloat(document.getElementById("portfolioValue").value);
var reinvestmentRate = parseFloat(document.getElementById("reinvestmentRate").value);
var yieldMaintenanceCosts = parseFloat(document.getElementById("yieldMaintenanceCosts").value);
var resultElement = document.getElementById("result");
resultElement.style.color = "#28a745"; // Default to success green
if (isNaN(currentYield) || isNaN(targetYield) || isNaN(portfolioValue) || isNaN(reinvestmentRate) || isNaN(yieldMaintenanceCosts)) {
resultElement.textContent = "Please enter valid numbers for all fields.";
resultElement.style.color = "#dc3545"; // Error red
return;
}
if (portfolioValue < 0 || currentYield < 0 || targetYield < 0 || reinvestmentRate < 0 || yieldMaintenanceCosts = targetYield,
// but still add costs if they are incurred.
var interestIncomeDifference = Math.max(0, (targetYield – reinvestmentRate)) * portfolioValue / 100;
yieldMaintenancePremium = interestIncomeDifference + yieldMaintenanceCosts;
resultElement.textContent = "$" + yieldMaintenancePremium.toFixed(2);
}