Supporting Relocating Employees in a Rising US Interest Rate Environment
External factors, such as rising interest rates, can have a dramatic impact on a company’s ability to attract, retain and move their key talent. Homeowners today may be reluctant to move due to rising interest rates if their current rate is less than the current market rate.
There are a number of approaches that companies can take to assist transferees in a rising rate environment, including:
In this article we will discuss each of these approaches, with examples and pros and cons for each.
Options for Addressing Rising Interest Rates
Each of the following options directly addresses the challenges of higher interest rates and offers solutions that can have a positive impact on the employee’s mortgage payment. While there is no solution that will make the transferee “whole” or completely make up the rate difference, providing one of these options may increase the likelihood that the employee will accept the move.
These options may increase your relocation costs, but the amount of support can be controlled by using budgets or by putting a set of pre-determined criteria in place.
Mortgage Interest Differential Allowance
A mortgage interest differential allowance (MIDA) is designed to assist with the gap between the employee’s new higher interest rate, and the lower interest rate they have on their existing mortgage. This benefit typically applies when the employee’s new mortgage rate is at least two percentage points higher when compared to the mortgage rate on the residence they are selling because of their relocation.
Support is provided for “same type” mortgages only (e.g. 30-year fixed to 30-year fixed, five-year adjustable to five-year adjustable, etc.). It is expected that the employee will apply 100% percent of the equity from the sale of their departure residence towards the down payment and non-reimbursable closing costs on the new residence. Any amount less than 100% can be deducted from the new mortgage amount when making the MIDA calculation.
The MIDA can be paid as a one-time payment, annually, quarterly or monthly in equal or graduated instalments.
Typically, a MIDA is provided for two years; however, programmes can range from one to five years. The first payment is paid after both homes have closed and all necessary documentation has been provided.
There are various ways that a MIDA can be calculated:
- Using the old mortgage balance
- Using the new mortgage balance
- Using the higher of the two mortgage balances
- Using the lowest of the two mortgage balances
Example: Calculation for a two-year MIDA
The MIDA is based on either the old mortgage balance or the new mortgage amount, whichever is less. For example, if the old mortgage balance is $250,000 at an interest rate of 3.50%, and the new mortgage amount is $300,000 at an interest rate of 6.5%, the MIDA is calculated as follows:
- 6.50% - 3.50% = 3.0%; >2% therefore eligible for MIDA
- Select the lower mortgage amount = $250,000
- $250,000 x 3.0% (interest rate difference) x two years = $15,000
Mortgage Payment Differential
A mortgage payment differential (MPD) is a pre-determined amount of money that is used to supplement the employee’s mortgage payments for a period of time (typically two to three years). The payment may be evenly distributed or graduated over time. This option is intended to help the employee ease into a higher mortgage payment and is not tied to a change in their interest rate. An MPD is typically used as a solution for high-cost areas, but it can also be effective in a higher interest rate environment.
MPD programmes are administered through participating lenders, like SIRVA Mortgage, who are coordinating the destination home purchase loan. Your organisation would establish the pre-determined benefit amount, duration and methodology of the support. SIRVA Mortgage, or your participating lender, would then apply a monthly amount for the duration of the benefit and effectively subsidise the monthly mortgage payment made by the transferee. The MPD cannot be used for any purpose other than to be applied to the transferee’s mortgage payment.
Example: Calculation for a $300,000 loan on a 30-year fixed rate at 6.50% with a $12,000 benefit (4% of the loan amount)
|Year(s)||Monthly P&I payment||Company’s monthly contribution||Employee’s monthly P&I payment||Company’s annual contribution|
|4 - 30||$1,896.21||$0||$1,896.21||$0|
|Total Company Contribution = $12,000|
A mortgage subsidy reduces the employee’s mortgage interest rate for a period of time. A participating lender would administer the mortgage subsidy for the duration of the benefit. Mortgage subsidy dollars cannot be used for any purpose other than to reduce (temporarily) the interest rate on the employee’s loan. The cost is determined once the interest rate is locked and the transferee has determined their exact loan amount. An option is to cap the buydown at a certain dollar amount. A mortgage subsidy is typically used as a solution for high-cost areas, but can also be effective in a higher interest rate environment.
Example: Calculation for a 3-year mortgage subsidy, for $300,000 mortgage, 30-year fixed rate of 6.5%
|Year(s)||Subsidised rate||Monthly *P&I payment||Company’s monthly subsidy contribution||Employee’s monthly *P&I payment @ subsidised rate||Company’s annual subsidy contribution|
|4 - 30||6.50%||$1,896.21||$0||$1,896.21||$0|
|Total Company Contribution = $13,416.96|
*The subsidised rate paid by the employee is 3% below the note rate in the first year, 2% below the note rate in the second year, and 1% below the note rate in the third year.
Points are a way for a relocating employee to permanently buy down their interest rate and lower their monthly payment. One point is equal to 1% of the loan amount, so for a $300,000 mortgage loan, one point would cost $3,000 While the reduction in the interest rate may vary with the market, the most common result is that each point bought will reduce the mortgage rate by approximately 0.25%. The cost of points cannot be deferred and must be paid at the time of closing. While the up-front cost will be higher than it would be without points, the home buyer is trading the initial expense for ongoing lower monthly payments.
As part of a relocation, companies typically take one of the following approaches when providing points:
- Provide a standard amount: 1 point or 2 points
- Provide points on a sliding scale based on the current interest rate. The higher the interest rate, the greater the number of points provided
|7% or less||0|
|7.01% - 7.49%||1/2|
|7.5% - 7.99%||1|
|8% - 8.49%||1 1/2|
|8.5% and above||2|
Provide point(s) if the new interest rate is greater than the designated spread between the existing mortgage rate and current rate.
|Interest Rate Spread||Point(s)|
|0 to 2%||0|
|2.01 to 3%||1/2|
|3.01 to 4%||1|
|4.01 to 5%||1 1/2|
|Interest Rate||Cost of Point(s)||Monthly Payment||Interest Paid over 10 years||Interest Paid over 30 years|
|6.25%||1 point: $3,000||$1,847.15||$174,371.33||$364,974.58|
|6.00%||2 points: $6,000||$1,798.65||$166,895.36||$347,514.57|
Pros and Cons of Rising Interest Rate Approaches
|Mortgage Interest Differential Allowance (MIDA)||
|Mortgage Payment Differential (MPD)||
How Can You Assist Your Relocating Employees?
Using the methods outlined above can help you support your relocating employees in navigating this challenging market, have a positive impact on your employees’ mortgage payments, and improve the chances of the willingness of employees to relocate. Which solution you choose is dependent on your employees’ individual circumstances, and on your relocation strategy and budget.
Whatever the financing needs of your transferees may be, SIRVA Mortgage is here to help. With 30 years of focus and expertise in relocation mortgage lending, we understand the important role home financing plays in the relocation process. Please visit our mortgage website to learn more, or contact me, at MortgageClientServices@sirva.com.