With U.S. mortgage interest rates rising between 6% and 7%, many people are beginning to see their purchasing power weaken. Since it has been nearly 10 years since interest rates have been this high, our latest blog provides recommendations that may be incorporated into your mobility program. These options can support relocating employees looking to purchase a home in the U.S. but may be concerned about giving up their low interest rate mortgage.
Companies may offer more than one of the following options, but most would not provide all three.
A discount point is used to buy down the interest rate. It is equal to 1% of the loan amount, and a point reduces the mortgage rate by approximately 0.25% for the life of the loan. For example, on a $300,000 loan, a discount point would cost approximately $3,000, and this would be paid directly to the lender, reducing a 6% rate to 5.75%.
Things to consider: policies often include a discount point or two when rates rise but does a reduction of 0.25% of the loan amount merit the cost that the company has to spend?
A mortgage subsidy is typically offered as a 2/1 or 3/2/1. The employer subsidizes the rate, and the transferee pays 3% less on the mortgage in the first year, 2% less in the second year, and 1% less in the third year. For example, in the first year on a loan with a 6% interest rate the company would pay 3% the first year (6% minus the 3% subsidy), 4% in the second year (6% minus the 2% subsidy), and 5% in the third year (6% minus the 1% subsidy).
Things to consider: While the cost of offering a subsidy is higher than discount points, it provides greater assistance. The mortgage subsidy payment will need to be coordinated between the employer, the mortgage lender, and the employee over a multi-year period and it delivers more support to the employee.
A mortgage interest differential (MIDA) compares the mortgage interest rate at the departure location and the mortgage rate in the new location. If the two rates are more than a certain percentage point difference, for example, 3%, then the employee would be eligible to receive the allowance.
Things to consider: The employee has to buy a product that is the same as their last (for example, a 30-year fixed mortgage) and if it is not the same, the differential does not apply. Also, it is typically only provided once a certain threshold has been reached such as interest rates of 6, 7, or 8%. The calculation for the differential is based on the difference between the old mortgage rate and the new rate, usually a difference of 2-3%. The amount is offered annually for two or three years and can be paid to the employee in their paycheck monthly or annually.
As we head into 2023, the hope for relocating employees is that rising inflation slows and mortgage interest rates settle, improving home affordability. In the meantime, the mortgage options we have outlined here could go some way to support your relocating employees in the U.S. market, ensuring a more successful relocation for them and their families, as well as your overall mobility program.
If you would like to discuss this topic further, please contact Cartus Consulting Solutions.
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