For the past year, much of the conversations about relocation lead to the FED’s steady interest rate increases and the subsequent impact on mortgage rates and housing affordability.
A little over a year ago, we posted about the impact increasing mortgage rates may have on the housing market and your relocating talent. At that time, rates had climbed to 5%, which was an almost unthinkable prospect just a few years ago. Today, rates hover around 7% and 6% for 30- and 15-year mortgages, respectively. While these rates are in no way the highest in U.S. history, they may serve as a shock to new home buyers while also presenting a reason for would-be home sellers to wait to list. These two forces together have led to a dearth in supply which, in turn, has helped some homes, in some markets, retain much of the inflationary value gained since 2020.
What is the practical impact of the rate hikes? Recent reports by Redfin give a dim view. They note in a late August article that a homebuyer on a $3,000 monthly budget has lost $71,000 in purchase power over the past year. We further highlight this impact below:
2021 | 2022 | 2023 | |
Purchase Price | $640,750 | $500,000 | $428,750 |
Loan Amount | $512,600 | $400,000 | $343,000 |
Interest Rate (30y) | 2.65% | 5.5% | 7.4% |
Monthly Payment | $3,000 | $3,000 | $3,000 |
PP Difference YOY | | ($140,750) | ($71,250) |
Is it all doom and gloom? Maybe not.
The National Association of REALTORS® remains optimistic that increasing rates have likely topped out. Chief Economist Lawrence Yun in July states: “Given the ongoing job additions, any meaningful decline in mortgage rates could lead to a rush of buyers later in the year and into the next.”
We also remain optimistic that any further increase in rates will be minimal. Still, current rates may remain for some time. Companies may want to consider including mortgage assistance as a benefit in some policies if they are not already doing so. Before implementing any kind of mortgage assistance, we encourage mobility teams to first consider their talent acquisition needs and competitive landscape, corporate culture, talent feedback, budget, and intent.
XONEX recently met with PNC Bank to discuss mortgage trends and common interest rate solutions. We’ve included below the most popular mortgage rate programs used in the relocation industry today:
“Today’s interest rates can be challenging for transferees, but the good news is we have tools and programs that can help ease the impact of today’s market on your transferees,” said Matt Canfield, SVP, PNC Bank, Relocation & Affinity Lending
Permanent Rate Buydown
Permanent rate buydowns include a one-time fee to permanently lower the interest rate and subsequent mortgage payment. It is the quickest, easiest and most affordable way for companies to provide some mortgage rate assistance. For this reason, permanent buydowns, on a fixed or sliding scale, are also the most popular solution. Please see the image below for an impact breakdown:
Scenario: $625,000 Purchase Price / $500,000 Loan
1% benefit cost to employer = $5,000
Rate buydown from 7.25% to 6.75% (30yr fixed)
Payment from $3,410.88 to $3,242.99
Savings to employee:
$167.89 monthly
$2,014.68 annually
$60,441.96 interest over the life of the loan
It’s important to note that rate buydowns are most efficient for transferees who are not likely to move again for some time. If your talent strategy involves relocating the same employees every 2-3 years, you may want to consider an alternative approach.
Mortgage Rate Buydowns with Sliding Scale
Mortgage rate buydowns are often coupled with a sliding scale. This strategy offers the same benefit as the permanent rate buydown above, while also giving companies the flexibility to only address rising interest rates. The sliding scale approach inherently addresses rates as they increase or decrease, preventing companies from having to change their policy to meet fluctuations.
Another benefit to the sliding scale approach is timing. Unlike a MIDA (discussed below) permanent and sliding scale solutions are distributed one-time. There is no further obligation from the company once the buydown occurs.
Sliding scale eligibility should be based on Freddie Mac’s Primary Mortgage Market Survey® from the prior week so that administration and eligibility are the same across all lenders in the network.
Mortgage Interest Differential Allowance (MIDA)
MIDA’s are designed to ease the burden of a higher interest rate in a new home over a period of time (usually 3 years). It is generally applied as a monetary amount based on interest calculations and paid to the transferee monthly over the course of the period.
If you consider a $500,000 mortgage, interest paid over the 3 years equates to $43,609.53 and $95,858.42 at a 3% and 6.5% rate, respectively. Thus, the transferee would pay an increase of $52,248.89 on their loan at the higher rate. Below is an illustration demonstrating how a MIDA would offset the monthly cost in practice.
While more expensive than a rate buydown, MIDA’s do offer some benefits that differ from buydowns. Invoicing generally happens between the RMC and the lender, simplifying the distribution of funds. There is also no corresponding gross-up. From a talent retention perspective, transferees will see the monies applied each month, which will serve as a reminder of the benefit they received.
On the other hand, it’s important to note that a MIDA solution does come with some risk. A MIDA commitment is ongoing for a set period of time, which means that the company must remain engaged with the transferee beyond the normal life of the relocation. For example, if the employee leaves within the period, paying parties must be notified promptly so as to avoid unnecessary expense. More complicated MIDA programs, including a step-down program, will require additional administration over the period.
Another important point to consider when using a MIDA approach is the transferee’s financial circumstance at the end of the period. MIDA’s are not a cure-all for high interest rates and the application of a MIDA could set an artificial expectation. At some point, your employee will need to cover the full cost of the remaining loan, including the interest. Will this be possible in three years?
There are a number of different ways to apply a MIDA, including both interest rate and dollar-based mortgage subsidies and coinciding step downs. The MIDA applications have been kept simple for the purpose of this blog post. Your relocation services provider and/or lender can provide more information about MIDA subsidies.
As you can see, there are varying options for addressing mortgage rate increases. This blog post is intended to be a brief overview of some common strategies. The details of each solution will certainly be more or less appealing based on talent goals, corporate culture, relocation type and budget. As always, we encourage mobility managers to discuss each option with their relocation provider and/or lender in order to determine the best path forward.
All illustrations provided by PNC Bank. Pnc.com/relocationsolutions.