- Interest Rates Are Rising. Here’s What It Means For Your Transferees And Relocation Mortgage Assistance Program
Interest Rates Are Rising. Here’s What It Means For Your Transferees And Relocation Mortgage Assistance Program
Kevin Graham5-minute read
December 10, 2021
Interest rates have started to rise. In the mortgage space, the Freddie Mac Primary Mortgage Market Survey shows that since October of last year, the average mortgage interest rate is up more than 0.35%. Although that doesn’t sound like much at first glance, it can make a big difference when spending hundreds of thousands of dollars.
With home values increasing at an incredible rate, even a minor increase in interest rate can impact purchasing power.
In this post, we’ll go over a little bit about why this is happening and what it means for your transferees and mortgage assistance programs.
Where Are Interest Rates Headed?
It’s a good bet that rates will continue to rise in the near future. The Federal Reserve has already begun to pull back on the purchase of mortgage-backed securities (MBS). As that happens, mortgage rates will likely go up because the rate of return on the mortgage bonds that support the mortgage market has to be higher to attract investors.
Further, inflation is a problem at the moment. Anyone who has tried to buy food or gas recently no doubt has felt the pain in the pocketbook. One way to combat inflation is by raising short-term interest rates at which banks borrow money.
The Federal Reserve controls the Fed funds rate. Although there is not a direct correlation between short-term interest rates on funds borrowed by banks and consumer interest rates, if it gets more expensive for banks to borrow, they’re likely to pass this cost on to consumers in the form of higher rates. The combination of these forces likely means that interest rates could rise in the coming months.
Finally, because interest rates were so low for so long to bolster the economy while the world learned to deal with COVID-19, this supported higher housing prices because lower interest rates meant that budgets stretched further.
Given this, the average price of a home is up 13.1% compared to the same time a year ago. Even if team members sell their home for more than they purchased it for, it’s likely that they’re having to pay on a higher mortgage balance at a higher interest rate than before.
Here’s what this means for your transferees' budgets.
A Practical Example
Based on the existing home sales data referenced above from the National Association of REALTORS®, the average loan amount in October of 2020 would have been around $307,539. Rates were also lower at the time, but let’s say conservatively that the rate they got by refinancing a year ago was 3%.
The monthly payment on this would be $1,296.60 on a 30-year term. Assuming all payments are made as scheduled, over the life of the loan, your team member would pay $159,235.86 in interest.
Let’s fast-forward to now. Rates have begun to creep up and your transferees are now dealing with higher home prices if they need to relocate. While it’s impossible to predict the future, a mortgage rate of 4% in the next year probably isn’t out of the question if the economy continues on its current trajectory.
The average price for an existing home in October of 2021 was $353,900. If we take that as the loan amount at an interest rate of 4%, the monthly payment is $1,689.57 for the same 30-year term. The total interest paid is $254,346.18.
That’s a difference in monthly payment of $392.97. Your transferees may be reluctant to move in this environment. However, business goals may dictate that you need the ability for your transferees to go where they are needed without waiting for the market to make sense.
This is where you come in as mobility leaders within your company. What can you do to confront this reality of a rising rate environment?
Reevaluating Your Relocation Policies
We understand the challenges that you have both attracting and retaining talent and putting the right people in the right place. As such, there are several things you can do from a relocation package standpoint.
Let’s run through them.
Helping With Prepaid Interest
One of the big things businesses have the option of doing is paying for loan discount points. To understand how these work, here’s an example.
To make the math easy, let’s say the loan amount is $300,000. One point is equal to 1% of the loan amount, but prepaid interest points can be bought in increments all the way down to 0.125%. Let’s say the employee’s 0-point rate is 4%, but buying 2 points gets them down to 3.5%. Offering to do this would cost your company $6,000, but your team member would be saving more than $30,640 on a 30-year loan.
You may have or may have had a program where you pay a 1% flat fee for loan discount points or had a sliding scale in the past like this, but many point-buying options only take effect at much higher interest rates of 6% – 8%, for example. With interest rates having been as low as they were up for so long, you may want to put the flat fee back in as interest rates rise.
If you have a sliding scale in place, it may make sense to lower thresholds. Instead of starting at 6%, you might offer to pay for 1 point if interest rates reach 4%, 2 points at 5%, etc. These thresholds make more sense in the current environment and help make moving more palatable for your transferees. If your goal is to help create a better moving experience for your transferees, adding such benefits can help retain the talent in your organization while making your company attractive when trying to compete for new talent.
Add A MIDA Program
Another alternative to look at is a Mortgage Interest Deferral Assistance (MIDA) program. Under this option, instead of paying for the points upfront, the business offers to pay the difference in interest between the client’s former mortgage rate and their new one for a certain amount of time in the event of higher rates since the client last got a mortgage. Here’s an example of how this works.
Let’s say it’s a $300,000 loan amount and the client’s previous interest rate was 3%. The current rate they can get is 4.25%, for a 1.25% difference in rate. The monthly payment difference is more than $200 for your transferee. If the business offered to pay the difference in interest over a period of 3 years to even things out, the cost would be $3,750 total or $1,250 annually. The mortgage subsidy is sent directly to the lender and reflected on the client’s payment.
Interest-Based Mortgage Subsidy
Another alternative is a subsidy that slowly increases your transferee's interest rate over time so that they can adjust to the payment. Your company pays the difference in rate each year until your transferee is paying the contract rate. You may see this referred to as a step-up mortgage or a 3-2-1 mortgage.
Here’s how this works: Let’s say the contract rate is 4%. In the first year of the term, your employee might pay 1% interest and in the next year it would be 2%, and 3% in the third year. In the fourth year, they will reach the contract rate and your company would no longer be subsidizing interest.
This can be a particularly attractive option for your transferees. From a business perspective, one of the downsides is that if the subsidy is interest-based, your total payout depends on the loan amount, which may be variable. To get around this concern, some companies define a dollar amount. Let’s see what that looks like.
Dollar-Based Mortgage Subsidy
If you wanted to know ahead of time how much you were going to be spending as a business unit, you can say that you’re willing to spend $30,000 (or whatever number you choose) toward helping with mortgage interest.
If $30,000 is the total benefit, you might choose to allow them to use 40% in the first year, 30% in the second, 20% in the third and 10% in the fourth. You spend $12,000 in the first year, $9,000 in the second and so on. The subsidy lowers the transferee's mortgage payment, and you know what you’re investing up front.
These are just some of the strategies mobility managers can look into in order to lessen the financial expenses associated with a move that transferees may incur.
Please reach out to your Rocket Mortgage Relocation Team to discuss options that can help you adjust to current market conditions that may impact your mobility program.
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