The spiraling costs and drama of the current housing market make employees more reluctant to relocate. Even with 30-year fixed mortgage rates nearly doubling over the past year, homes are still selling quickly in most markets and bidding wars remain common. Many relocating employees face the unpleasant prospect of not only paying more but also giving up an ultra-low interest rate. The situation becomes even worse if the transferring employee is moving to a higher cost of living area. Fortunately, companies can offer creative relocation mortgage benefits to soften this financial blow and entice these employees to relocate. Here are some solutions to consider:
- A Sliding Scale benefit is a one-time expense used to buy down the interest rate on a new home permanently. It’s intended to support transferees in a rising rate environment.
- The employer designates at what rate the scale starts and how many mortgage discount points it will cover for each interval of the scale.
Pros: Permanently buys down the interest rate. A one-time expense. Typically a lower-cost option. Administration is relatively simple.
Cons: Doesn’t take the transferee’s current mortgage situation into account. Could result in too much or too little assistance. Must be monitored and updated to ensure the company is only assisting in a rising rate environment. Can be hard to validate that lenders are applying the program accurately and charging the correct number of points.
Mortgage Interest Differential Assistance (MIDA)
- A Mortgage Interest Differential Assistance (MIDA) Program eases the gap between current market rates and the transferee’s lower existing mortgage rate.
- The MIDA payment is determined by taking the difference between their current interest rate and the new (higher) mortgage interest rate for like products (e.g., 30-year fixed rate) and multiplying the difference by the qualifying amount.
Pros: Takes the transferee’s current mortgage situation into account. Can be the best way to make them whole and match their current mortgage situation. Eases transferees into the higher payment. No undeserved windfalls.
Cons: Not a permanent buydown. More administrative work to verify the transferee’s current mortgage situation. Can be more expensive, depending on the length of assistance. Need to monitor to ensure the transferee hasn’t left the company.
Interest-Based Mortgage Subsidy
- An Interest-based mortgage subsidy that slowly increases a transferee’s interest rate over time so they can adjust to the payment.
- Typically referred to as a 4-3-2-1 or a 3-2-1 mortgage subsidy depending on how many years the transferee receives the benefit.
- The employer pays the difference between the mortgage payment at the current note rate and the lower subsidized rate.
- Each year, the transferee’s rate will increase by one percent, easing them into their higher mortgage payment.
- Calculated based on transferee’s mortgage note rate and loan amount.
Pros: Eases transferee into a higher payment. Can work well for transferees who are likely to move again within five years.
Cons: Benefit is temporary. Doesn’t take the transferee’s current situation into account, so they could receive a windfall. Need to monitor to ensure the transferee hasn’t left the company.
Dollar-Driven Mortgage Subsidy
- A dollar-driven mortgage subsidy is a benefit in which the employer designates the dollar amount for individual transferees or by transferee level.
- Many companies consult a platform like Motus (formerly known as Runzheimer) to determine the amount they should provide.
- The lender then determines the subsidy schedule within the policy and loan product guidelines.
Pros: Helps ease transferee into higher payment. Takes their current situation into consideration. The employer cost is not subject to individual loan amounts or current interest rates. Employers can determine the amount pre-move and pre-home selection.
Cons: Not a permanent buydown. Can be a relatively expensive solution. Need to monitor to ensure the transferee hasn’t left the company.
Loss on Sale Benefit
Aside from rising mortgage rates, employers and transferees might face another housing problem soon. “It’s becoming increasingly clear that the real estate markets are headed for a correction,” says George Ratiu, senior economist with Realtor.com.
Employees who bought at the height of the market and paid bidding-war prices might face a loss on sale if they need to sell their home in the shorter term. Some might be unwilling or unable to relocate without additional assistance. In addition to relocation mortgage benefits, companies might need to reconsider a benefit many removed from their mobility programs following the housing market collapse in 2008.
Loss on Sale
According to Worldwide ERC, most companies that offer loss-on-sale assistance make it available to all homeowner employees. We recommend a consistent and fair approach.
Most employers that offer loss-on-sale assistance require the employee to share in the loss. One approach is to contribute after the employee has met a deductible or a percentage of the loss. Another method is to limit assistance to a certain level.
In theory, the impact of capital improvements on a home’s value should be reflected in the final sales price, so no additional consideration should be required. Therefore, we advise our clients to perform calculations based on the home’s final sale price.
Pros: Can help persuade a transferee to relocate. The employer and employee share the loss.
Cons: Calculations can be complex and might seem arbitrary to the transferee. Capital improvements can be a source of disagreement/dissatisfaction. Concerns around precedent and equity.
Relocation mortgage benefits and loss on sale benefits can reduce your employees’ reluctance to relocate. Learn more about current best practices in TRC’s comprehensive U.S. Relocation Policy Best Practices ebook.