What Investors Need to Know About Yield Maintenance

By on July 9, 2015

Real estate investors seeking financing on their single-family rental portfolio may misunderstand how yield maintenance can affect a loan prepayment. It is something investors should be aware of, as it may affect their financing strategy.

Yield maintenance is a prepayment penalty that allows a lender to attain the same yield whether or not the borrower holds the mortgage until maturity.

Yield maintenance is common in the commercial mortgage market, but not in the residential lending market, so investors who have typically used residential loans may not be familiar with how it works. Since B2R Finance makes commercial loans, we are able to evaluate the cash flow of your rental properties rather than your personal debt-to-income.

It is important for borrowers who exit a loan early to be informed about how they will be financially impacted by a yield maintenance penalty. If the loan is securitized, the yield maintenance terms cannot be changed post origination. Thus, we advise that property investors clearly understand the terms before signing their loan documents.

The actual cost of a yield maintenance penalty is based on the movement of interest rates. The yield maintenance formula is the present value of remaining loan payments multiplied by the difference between the loan interest rate and the rate on a Treasury note of the same duration. At B2R, yield maintenance is calculated to the loan’s maturity date, and the borrower is responsible for any remaining payments at the point of prepayment.

Yield maintenance is not unique to B2R Finance since almost all loans with more than a five-year term will have a yield maintenance penalty. The upside for borrowers is that they will get a better interest rate on a loan with yield maintenance, because the lender is protected from prepayment.

Read more at Welcome to Buy to Rent Finance

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