Yield Maintenance Clause
A Yield Maintenance Clause is a provision commonly found in loan agreements, particularly in commercial real estate financing. This clause is designed to protect lenders from the financial impact of early loan repayment by borrowers. It ensures that if a borrower pays off their loan before the scheduled maturity date, they must compensate the lender for the lost interest income that would have been earned if the loan had remained outstanding for its full term.
The calculation of the yield maintenance amount typically involves determining the difference between the interest rate on the loan and the current market interest rates at the time of prepayment. The borrower may be required to pay an amount that equates to the present value of future interest payments lost, which is often calculated using a specified yield curve or benchmark interest rate.
For example, if a borrower has a $1 million loan at a fixed interest rate of 5% with 10 years remaining, and they decide to pay it off early when the current market interest rate is 3%, the lender could impose a Yield Maintenance Clause. The borrower would then need to pay an additional amount that compensates the lender for the income they would have earned on that loan at 5% for the remaining term.
This clause serves as a deterrent against early repayments, thus providing certainty and stability to lenders regarding their expected cash flows.
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