Yield maintenance is a prepayment penalty on many fixed-rate commercial loans. Here's how it works, why it can be costly, and how it differs from defeasance — before you refinance or sell.
Yield maintenance is a prepayment penalty designed to make the lender whole if you pay off a fixed-rate loan early. It compensates them for the interest they expected to earn over the remaining term, so they're indifferent to the early payoff.
In broad terms, it's the present value of the remaining interest payments, discounted at a low reinvestment rate (often a comparable-maturity Treasury yield), with a floor that you repay at least the principal. When market rates are well below your loan rate, that present value — and the penalty — can be large.
The penalty comes straight out of your refinance or sale proceeds at closing. A deal that looks like it pencils on rate alone can fall apart once yield maintenance is included, so get an estimate from your lender or servicer before you commit to a payoff date.
Both compensate the lender for early payoff. Yield maintenance is a direct cash penalty you pay; defeasance instead requires buying a securities portfolio that replicates the remaining payments. Yield maintenance is simpler and common on bank and life-company loans; defeasance is standard on CMBS.