10 things to know following the removal of the limit on the prime component and the reduction in mortgage recycling
Monthly repayments go down, long-term risk goes up
Photography:
Envato Elements
Produced by the Department of Special Supplements
The Bank of Israel's decision to remove the limit on the portion of the mortgage that can be linked to prime interest rates shook the mortgage market.
How will the move affect mortgage takers, what are the options available to those who already have a mortgage, and what does all this say about housing prices?
10 facts worth knowing, and you may be able to save thousands of shekels a year.
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What exactly is the change?
The Bank of Israel has removed the limit on the prime component, and it will now be possible to take two-thirds of the loan linked to the prime.
Until today, only a third of the mortgage could be attached to the frame.
The Bank of Israel has now left only one limitation: a third of the mortgage must be at a fixed interest rate.
The bank also announced that the early repayment fee will be reduced by 50% after 8 years, which will reduce mortgage recycling.
Why was it decided right now?
The aim is to make it easier for the borrowing public and allow them greater flexibility in choosing financing routes, against the background of the corona crisis.
What is prime interest anyway?
The prime interest rate is set by the banks and serves as an anchor for pricing various transactions, such as loans and deposits.
The prime serves as a basis for a performance test determined by each bank for the pricing of financial transactions, and in this context - housing loans.
The prime interest rate is linked to the Bank of Israel interest rate, and stands at 1.5% above it.
Currently, the Bank of Israel has set the prime interest rate at 1.6%.
Usually in mortgage routes a discount is given on the prime interest rate (for example, prime minus 0.7%).
What will be the impact of the move on the monthly repayment of mortgage takers?
The prime interest rate is the cheapest component in a mortgage.
The possibility of attaching twice as much of the loan to the prime is equivalent to offsetting hundreds of shekels a month, ie thousands of shekels a year (depending on the amount of the loan).
For example, if you take out a NIS 1 million mortgage, you can now attach NIS 660,000 to the prime interest rate, compared to NIS 330,000 previously.
This is a saving of at least NIS 7,000 a year.
Is the Bank of Israel's decision relevant only to new mortgage borrowers?
No.
Anyone who already has a mortgage may consider refinancing it.
That is, close the existing mortgage by taking out a new mortgage, while increasing the prime component.
So is it worth refinancing a mortgage now?
With large loans, tens of thousands of shekels can be saved on the total repayment, assuming that the basic interest rate in the economy is expected to remain low in the coming years.
It is important to ensure that the savings in repayments are higher than the fine for early repayment of the mortgage, taking into account the Bank of Israel's decision to reduce the early repayment fee.
The increase in risk must be taken into account, in case the interest rate in the economy rises in the future.
Why is prime interest rate considered more risky?
Linking a loan to a variable interest rate entails a greater risk than a fixed interest rate.
A future rise in interest rates in the economy could bounce back the monthly repayment.
At the same time, in today's price environment, it is estimated that the basic interest rate will remain at its low level for a long time to come.
Are banks expected to raise other parts of the mortgage as a result of the change?
The mortgage market is very competitive, so it seems that banks will have a hard time doing so.
Linkage to prime interest rates may reduce the bank's profits, but it will also reduce the risk for the bank, because the risk passes to the customer in the event that the interest rate rises.
Are there any considerations for avoiding increasing the prime component of a mortgage?
An element of a high amount of prime for a long period of time may cause the mortgage to rise in price, in case the interest rate rises in the future.
Interest rates are currently low, so it also makes sense to choose a route with a fixed interest rate.
What will be the impact on apartment prices?
The move may increase demand and cause housing prices to rise.
The reduction in mortgages is expected to lead to an outbreak of subdued demand and fuel the real estate market.
This article was prepared with the assistance of real estate appraiser Shmulik Cohen from
SK
Appraisal and Meir Wieder, CEO of Wieder Mortgages
Produced by the Department of Special Supplements