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Removing the frame limit did not help. Who will still enjoy it? - Walla! Business

2021-02-28T15:34:31.145Z

The prime limit has been removed, but in many cases this is expected to result in a financial loss to the customer. How did a move that was supposed to improve the situation of mortgage refinancers become an interest trap for them and who could still profit from the move?



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Removing the frame limit did not help.

Who will still enjoy it?

The prime limit has been removed, but in many cases this is expected to result in a financial loss to the customer.

How did a move that was supposed to improve the situation of mortgage refinancers become an interest trap for them and who could still profit from the move?

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  • Mortgage

David Rosenthal

Sunday, 28 February 2021, 17:23

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The latest regulations of the Bank of Israel, which remove the prime limit that was customary in the mortgage mix in the last decade, also apply today for mortgage refinancers, but in many cases, this is likely to lead to a financial loss for the customer.

How did a move that was supposed to improve the situation of mortgage refinancers become an interest trap for them?



The intentions of the Governor of the Bank of Israel, Prof. Amir Yaron, were certainly good: about three months ago, he decided that the restriction on the share of the prime component in the mortgage mix in general would be removed.

The prime interest rate is in fact the Bank of Israel interest rate plus 1.5%, which represents a profit margin for the banking system and the cost of risking spending money from a risk-free deposit at the Bank of Israel, for a loan to a customer.

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Good intentions, less execution.

Governor of the Bank, Prof. Amir Yaron (Photo: Official website, Bank of Israel Spokeswoman)

The prime component was previously limited to one-third of the mortgage because the interest rate on it is linked to the interest rate in the economy and the Bank of Israel feared that the interest rate would rise quickly, which would lead to a significant difficulty in repaying the loan by home buyers.

The restriction was originally intended to deploy a safety net on borrowers and banks, also by cooling the housing market by curbing the demand for mortgages. And in the bottom line - the public paid and continues to pay much more for the apartments they bought. In light of this, the Governor of the Bank of Israel hoped that increasing the prime component would lead to lower mortgage rates for borrowers. Why? First, prime interest rates are currently low. In light of the expectation that this will remain low, a prime-linked mortgage should continue to be the cheapest route.



Most mortgages in Israel consist of two or more components from the following options: Index, variable interest rate), index-linked fixed interest component and non-index-linked fixed interest component.As stated, the Bank of Israel expected that an increase in the prime component would lead to a decrease in the average interest rate paid on the entire loan, and

Separately and it seems that no one but the Governor thought that the banks would so easily give up the bonanza of the enormous profitability around the provision of credit to mortgage lenders.

In practice, the provision has permeated, but instead of lowering the mortgage, the bottom line is that it has become more expensive.

The expectation at the Bank of Israel was that the banks that enjoy a yield of more than 10% in providing loans for residential mortgages, will give up some of the cream for the benefit of the public.

But this turned out to be a lack of grip on reality.


The move taken by the banks is to maintain the banking margin, ie the profit resulting from the difference between the interest the bank receives from the customer on a loan and the interest the bank pays on the loan it took from the Bank of Israel to lend the money to customers.

In other words, the banks will increase the interest rate, thus creating a situation where until now a customer who took a third of the loan amount in the Prime route would receive a prime minus half on average, but since the Bank of Israel announced the benefit, the route has increased, so that those who take the full second third can reach Prime + 0.2 (which is interest 1.8).



Therefore, it is clear that the mortgage cycle while utilizing the maximum 'benefit' of two-thirds in the prime track, not only does not reduce the monthly repayment, but also adds another hump on the back of the refinancers.

There are those for whom change will not hurt.

Shahar Carmon (Photo: Yachz)

Still, there are a number of mortgage refinance profiles that can benefit from the move.

who are they?

According to Shachar Shachar Carmon, CEO and owner of Prime Finance and Mortgage Management, the largest company in Israel in the field, there are two situations in which this becomes worthwhile. The first: in the case where the mortgage is taken for a long period, but intended for the short to medium term (investment apartments or price apartments In such a situation, the customer's exposure level to short-term interest rate volatility and therefore its considerations are different from those required to deal with the repayment for long periods.



In addition, Carmon notes, Of NIS 20,000 or more net, less liabilities. Although the prime is expected to increase by at least a percentage over the next five to six years, which is expected to lead to a cumulative increase of about 10% in the monthly repayment, this change will not acutely disrupt the borrower's normal course of business. And so will not significantly impair the management of the family cell flow.So



yes, the prime interest rate currently stands at a relatively low rate of 1.6% which beckons quite a bit from mortgage refinements however as mentioned, recycling also involves significant risk, which makes the choice of route complex.

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Source: walla

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