In the ever-evolving landscape of the US housing market, where mortgage rates are on the rise and the market continues to retract, we want to take a fresh look at select tried-and-true policy components to see how they can benefit both employers and employees in the coming years.
What options are there for companies helping relocating employees purchase in the host location?
A familiar favorite, this new home mortgage offering allows companies to fund a small yet fixed reduction in a mortgage rate, often on a sliding scale when rates exceed a specified threshold, such as 8%.
This option is also concentrated on the new home mortgage rate. It has a larger, immediate impact on buying power. It often operates on a graduated scale, reducing the interest rate over a one-to-three-year period, allowing homeowners to assimilate financially, balancing the burden over time.
MIDA offers the most robust impact on buying power as it steps in to cover the difference in interest rates between the old and new mortgage. This strategic move neutralizes a portion of the difference when assuming a higher rate. Typically provided over a one-to-three-year period, MIDA can include a cap for the amount or interest differential percentage in the offering.
When reviewing the different options, we believe MIDA strikes a good balance. It directly counters the current challenge of high mortgage rates and can be controlled through a monthly allowance that ceases upon termination or refinancing. When considering MIDA,we suggest incorporating eligibility criteria such as ensuring the new loan has the same term (e.g., 30-year fixed), the rate difference is at least 3% higher, and the new rate exceeds 8%.
In high-cost locations, attracting talent can be further complicated. That’s where the Cost of Living Differential (COLA) can offer support by providing a consistent method for comparing spendable income against the cost of a market basket of goods and services (e.g., housing, transportation, common goods, and state taxes). In areas where local costs are 5%-10% higher than the home location, employers may offer a suitable allowance. The calculation can be applied for a homeowner or a renter and can be capped. Typically, this allowance is given to the relocating employee for the first one to three years of an assignment and is gradually adjusted as the employee assimilates to destination location spending.
We recommend COLA calculations are based on a capped salary to assess reasonable spendable income (e.g., $225,000 – $250,000). This approach protects unnecessary spending for the company. Additionally, it is best practice to adjust to a monthly allowance utilizing a graduated year-over-year payment scale that can be discontinued upon termination.
Time-tested strategies such as these provide companies with the tools to navigate the challenges of the US housing market and attract talent in high-cost locations. By carefully considering these options and aligning them with your company’s goals, you can make informed decisions that will positively impact your mobility budgeting in 2024 and beyond.
For more information on this or any other aspect of your mobility program, please contact your Cartus representative or email cartussolutions@cartus.com.
Thank you to Robyn Russell, Manager, Consulting Solutions, and Erika Reichert, Director, Relocation Accounting, for your collaboration on this blog post!
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