Choose to live far from Tel Aviv? This has an effect on your mortgage interest rate, and not for the better

A study by the Bank of Israel found a direct link between higher mortgage interest rates and housing in the periphery. We also found that better interest rate conditions for buying an apartment are obtained at the bank where our current account is held, and that the prospect of a more convenient interest rate increases in localities with more transactions

Living far from the center? Probably your mortgage interest rate is higher than Tel Aviv residents - according to an unusual study published by the Bank of Israel, which examined the impact of the location of the purchased property on its mortgage pricing as well as the financial condition of the borrowers. The study reinforces previously heard claims that weaker groups on the periphery pay more for the housing component. The study shows that part of the explanation for this is the low competitiveness of the mortgage market in the peripheral communities, as well as the relatively low wages, which "mark" these customers as risky for the banks. This is in addition to the fact that the properties in the periphery are generally more problematic to realize.

Dr. Natalia Pressman and Dr. Nitzan Tzur Ilan of the Bank of Israel's Research Department conducted the study. To reflect the risks posed by the regional housing market characteristics and the degree of competition that exists in the banking mortgage market, the two used 80,000 mortgages taken between 2010-2013 and the properties financed through these mortgages.

To examine the effect of the location of the acquired property on the mortgage interest rate, all statistical areas (neighborhoods) were divided into nine groups, defined by the distance from the center of Tel Aviv, and also by the socioeconomic level of the same statistical area. For each group of distances (up to 40 kilometers, between 40 and 80 kilometers and more than 80 kilometers from central Tel Aviv), three socioeconomic (low, medium and high) groups are defined according to the CBS characteristics.

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The closer to the center, the better

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The conditions are better in your bank

The data analysis showed significant findings: While the interest rates paid by tenants in central Israel-based neighborhoods are on the lowest average, the interest rates of tenants in disadvantaged neighborhoods in the periphery are the highest on average. For example, residents who live in the 40 km range of Tel Aviv in a high socioeconomic level neighborhood receive much better conditions than those who live within 40-80 km of Tel Aviv and also live in a high socioeconomic level neighborhood. The average difference is 0.054%.

When the findings are broken down into parts, it becomes clear that, in general, higher-income households pay lower interest rates on mortgages. The study found that a 10% increase in household income alone could lead to an average annual decrease of 0.02%.

Another finding relates to the identity of the bank where we manage our mortgage. According to the findings, borrowers who take out a mortgage at a bank where they manage a current account pay an average interest rate of 0.1% lower, compared to customers who take their mortgage at a bank that does not know them as customers.

further. The population of housing enhancers, on average, pays a 0.3% lower interest rate, compared to first-time home buyers with similar characteristics who purchase a home in a similar location. The gap between investors and first home buyers is even greater - 0.07% in favor of investors.

The study also found that borrowers taking their mortgage with LTV (mortgage ratio to asset value) higher than 60%, pay high interest rate at 0.06% above average.

And there are other findings. Borrowers who take their long-term mortgage for a period longer than 20 years pay a high interest rate of 0.2%.

And here's another lesser-known point that finds a connection between "liquidity" of a settlement and the level of your mortgage. A settlement in which there are many transactions relative to its size is considered a "liquid" settlement for the banks, who know that it is relatively easy to realize the property. The study found that a 10% increase in the liquidity of the housing market in the locality would result in an average reduction of 0.08%.

Another point to consider: Borrowers who take their mortgage outside the locality where the property is purchased pay, on average, a low interest rate of 0.04% -0.08%, compared to borrowers who take their mortgage in the locality where they purchase the property.

And finally - the competitiveness. According to the study, a high level of competition between the banks in the mortgage market lowers the interest rate: the addition of one competing bank branch in the locality where the property is purchased is identified with an average decrease of 0.016%.

More fluid, easier in the pocket. Tel Aviv (Photo: Reuven Castro)

Tel Aviv (Photo: Reuven Castro)

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The relationship between price and the mortgagee

"I often meet people who tell me - 'Why do I suddenly drive from Sderot to Be'er Sheva because of her mortgage?' They do not understand that this is a step that could save them tens of thousands of shekels," says Amit Kaminsky, CEO of AMG Mortgage Advice. The most extreme of these is Eilat. Eilat is an independent state when it comes to interest rates on mortgages. She's not even a periphery and the residents there, or in Kiryat Shmona, are really incarcerated. I had very strong clients, who understood their interest and took a flight to open their mortgage portfolio in Tel Aviv. "

According to him, the findings are of particular concern to buyers of peripheral residents in the Price to Housing program, who watch most of the parameters that result in higher interest rates according to the study: They are young, high-income people who buy apartments in low-cost places, at high LTV rates.

"The bank has a greater risk for them and there is no question here at all, so the cost for them is much higher, and it can reach even more percent," says Kaminsky. "All this means is that people have to make the account for themselves before entering into such a deal."