Apartment prices have soared in the past year at an annual rate approaching 18%, and according to estimates in the real estate market, apartment prices will continue to rise at a high rate in the coming months as well. At the same time, the Bank of Israel's interest rate has risen in the last five months from its zero level to today's 2%, and here too the expectation is To continue the upward trend until the interest rate in the economy reaches the level of 3.5%-3% in less than a year. Following the increase in the interest rate, the expenses of the households that hold a mortgage have increased by hundreds of shekels per month, which is reflected in an additional cost of tens of thousands of shekels over the life of the mortgage.
The rising interest rate and the high apartment prices are giving their signals, and the Bank of Israel reported in recent months a decrease in the volume of new mortgages.
The mortgage divisions of the banks say that this decrease is well felt, but they expect that this is only a temporary decrease, since rental prices do not stop rising, and the rate of natural population growth in Israel is high - so the demand for mortgages is not expected to decrease significantly.
"The mortgage market is ultimately a mirror of the housing market. In recent years, we have seen a high demand for housing, which translated in accordance with the demand for mortgages," says Ariela Randalstein, head of Bank Hapoalim's mortgage department in a conversation with Israel Hayom.
"The demand for mortgages in 2021 doubled compared to 2020 and continued to rise in the first half of 2022 - this is due to an increased amount of transactions, along with an increase in mortgage amounts in light of an 18% increase in housing prices in the past year. Also, the market conditions were 'favorable' for taking out mortgages in light of the low interest rate environment, especially compared to the existing alternatives such as paying rent.
"The mortgage market is a mirror of the housing market", photo: GettyImages
"At the beginning of the year, we experienced changes in the market, in the business environment, in interest rates and expectations for future interest rates and inflation. Interest rates and inflation have increased, and there are expectations for their continued increases. These changes have a great impact on the housing market, and hence also on mortgages. However, these are not the only influencing parameters." she adds.
So what do you expect in the mortgage system in the future?
"On the one hand, we expect that in a situation of rising interest rates, the demand for housing will decrease due to the increase in the price of mortgages. Indeed, in the last few months we can see a decrease of about 15% in the number of new transactions. This started with a decrease in transactions among investors, in light of an increase in the purchase tax and the improvement of conditions in alternative investments alongside The increase in the cost of mortgages. However, it is also possible to identify a certain decrease in customers who purchase a single or replacement apartment. This is also expressed, among other things, in a certain decrease in the number of people interested in a new mortgage.
"On the other hand, it's important to remember that the demand for housing exceeds the supply, and in the absence of a better alternative - the rent is much higher. Given that in the last year the government marketed a large amount of housing units, a large housing and mortgage market can still be expected, especially in relation to 2019. So it's too early to say whether This is a downward trend that will continue. We estimate that this is actually a temporary lull in which the audience examines the possibilities in the face of the new conditions, or waits for the lotteries in question to become actual apartments."
Needed: "A credible government program"
Even at Mizrahi Tefahot Bank, which currently manages the largest mortgage portfolio in Israel by a considerable margin, similar trends are recognized in the mortgage market, and despite the decrease in the volume of mortgages that has occurred in recent months - it is expected that the volume of performance will continue to be high.
Dror Feldman, director of the mortgage branch at Mizrahi Tefahot Bank, says that due to the interest rate increases and their effect on mortgage repayments at the beginning of the third quarter of 2022 - the bank began to notice a certain decrease in the volume of new applications for mortgages.
"It is likely that this trend will be reflected in the performance of the coming months and moderate them to some extent. And yet, even if we see another decline in the mortgage market, it will be relatively moderate, and the scope of the performance will continue to be high, certainly compared to the pace we were used to before the recent 'peaks'."
The scope of performance will continue to be high.
Dror Feldman,
According to Feldman, "The increase in interest rates is definitely burdensome for mortgage holders, but on the other hand, they see how the prices of apartments go up and up, while the alternative - rental prices - is also getting more expensive. That is, alongside the 'moderating' effect of the increase in interest rates, there is an 'opposite effect' of prices Housing from Emirs, who 'push' customers to make an effort and purchase an apartment. To this must be added the political instability that has characterized Israel in recent years, which makes it very difficult to launch an orderly and above all reliable government program."
If the monthly repayment makes financial management difficult, what is recommended to be done?
"For those who have already taken out a mortgage, the increase in the monthly repayment has turned from a 'potential possibility' into a real reality. At this stage, assuming an average mortgage with a prime component of between 30% and 40%, it is an increase in the price of between tens of shekels and a few hundred shekels in the monthly repayment. This of course increases the total family expenses, but still, in the majority of cases, households know and are able to cope with this increase in price. In cases where a difficulty arises, you can always contact the bank to find a suitable solution, by way of recycling the loan, reducing the exposure to variable interest rates and changing the repayment the monthly for the long term and/or a temporary reduction of the monthly repayment".
The Bank of Israel interest rate increased from 0.1% to 2%. What is expected going forward, and how much more expensive is the return on the average mortgage expected to become?
"The reason for the increase in interest rates in the economy in recent months is the steep jump in inflation. Like other central banks in the world dealing with this problem, the Bank of Israel is also determined to return inflation to its course, and in its view the most effective tool for this purpose is raising interest rates. In early October, the Bank of Israel is expected to announce its decision on the subject, which will be affected both by the August index that will be published on September 15 and by future inflationary expectations.
"The hope is that we are beginning to approach an interest rate environment that will allow inflation to be 'taken over' and returned to the target. When it comes to customers with an active mortgage, an increase in the Bank of Israel's interest rate affects the portion of the prime component of the loan, and the greater the weight of this portion of the loan, the correspondingly increases the monthly repayment. In the hope that there will be no unexpected surprises, I cautiously estimate that most borrowers will succeed in this challenge. However, those who already feel, or will feel so in the future, that the monthly repayment has become more expensive in a way that makes it very difficult to manage the household, can always contact their banker to examine together suitable solutions".
I want to take out a mortgage today, what should I consider when choosing the route?
"Reality teaches us that in building the best mix, we must first focus on examining the monthly repayment that is suitable for the household, including the ability of the borrowers to deal with changes that may occur over the years, both in the economic environment and in everything related to the changing needs of the household.
"It is very important to take into account the unique characteristics of each family, its financial capabilities, its changing needs, and more. The monthly repayment, as it is called, is met every month, and you need to make sure that it fits well into the total household expenses and does not, God forbid, become oppressive and unbearable. With proper planning It is possible to reach a mix that will suit your needs and allow you to walk until the end of the loan period safely and successfully.
Construction site, photo: Yehoshua Yosef
"When it comes to loans with terms of 20-30 years, events of an increase in interest rates must also be assumed - just like we are experiencing these days. There are different mortgage routes and the same monthly repayment can be reached in different ways, and this is exactly where the mortgage banker comes into the picture, who knows what the parameters are that need to be taken into account When taking out a mortgage, while finding the right balance between a fixed interest rate that does not change throughout the life of the loan and a variable interest rate. Other important parameters are the loan period in each of the routes, the ability to make early repayment, etc. So to compare different offers it is not enough to look only at the interest rate in a loan, but it is necessary to make sure that the chosen mix is suitable for the specific needs of the household. A mortgage that is suitable for one household is not necessarily suitable for another."
Towards competition between the banks?
For many households, taking out a housing loan, a mortgage, is the biggest transaction they will ever make, and probably also the most complex.
It is difficult to exaggerate the importance of bargaining over the banks' interest rates, and also the importance of understanding the transaction itself.
At the end of last year, the Bank of Israel announced a new consumer reform, the mortgage reform, which aims to increase information transparency and competition in the mortgage market.
The reform, which came into effect at the end of August, is intended to help home buyers who wish to take out a mortgage in making an informed decision based on all relevant data, which will be presented to them as clearly and simply as possible.
The reform of the uniform baskets of the Bank of Israel is intended to increase transparency and the ability to compare the banks' offers.
To this end, the Bank of Israel has determined that each bank will provide the customer interested in a mortgage with three paths in a uniform and pre-defined structure: basket 1 - 100% at a non-linked fixed interest rate;
Basket 2 - 50% at non-linked fixed interest and 50% at prime interest;
Basket 3 - 33.33% in non-linked fixed interest, 33.33% in prime interest and 33.33% in variable interest (every 5 years) linked.
The basic approval form that the client will receive will include the following comparison data: the first full monthly repayment, the highest monthly repayment during the loan period, the total amount of payments, and more.
The goal is to allow the customer to compare the banks - something that used to be more complex, especially for those who are less knowledgeable about mortgages.
All data will be reflected on the basis of Bank of Israel forecasts for inflation and interest until the end of the loan period.
Along with the uniform routes, customers will also receive another offer: a customized fourth basket, built by an expert banker, with a loan mix that is optimally adapted to the customer's current and future needs.
The mortgage reform, as important as it is, will not lower housing prices, but it can save thousands of shekels for the apartment buyers, and this by providing transparency in such a cumbersome area - transparency that will also improve bargaining power.
It is still too early to say whether the reform will succeed in achieving its goal and make mortgages accessible to the general public, but in the meantime the bank supervision unit of the Bank of Israel is optimistic.
"One of the goals of the reform was to improve the customers' ability to understand. In addition, the reform was intended to improve customer service from the banks in the field of mortgages. As soon as the ability to understand the terms offered improves, and the offer is accepted quickly, it will be easier to compare the banks and ultimately get the mortgage that is the best suitable for the customer. Beyond that, we wanted to achieve an improvement in the customers' ability to check the viability of mortgage recycling at later stages," explains Granit Ofek, manager of the bank-customer regulation unit at the Bank of Israel's supervision of banks.
Ariela Randalstein,
Ofek adds that with the implementation of the reform, the time from submitting the application to receiving approval in principle will be shortened significantly: from the moment an application is submitted, it will be possible to obtain approval in principle within five business days, and it will be possible to submit the application and receive an offer from the bank remotely - by phone or on the website - and there will be no need to go to the branch like in the old days.
According to her, "The new certificates contain some data that were not shown to customers in the past and are of great importance in making a decision: three uniform baskets, which the Bank of Israel defined in advance. These baskets allow customers to compare 'apples to apples' and find the cheapest bank. In addition, in each basket, in addition to the amount The first monthly repayment is also the amount of the highest expected monthly repayment, and the total expected payment that will be paid by the end of the period for the loan. These data illustrate to the customer the future cost of her mortgage and allow her to examine whether she will be able to meet the repayments."
To the question of whether the reform will make the use of mortgage advisors redundant at some point, Ofek answers in the negative and says that "the mortgage advisors help adapt the uniform baskets to the specific needs of each customer, and there are customers for whom this service is valuable. In this context, I would note that as part of the reform, at the end of September, the banks will present On their websites are mortgage calculators that will allow customers to do simulations and get an impression of the effect of changes in the various parameters on the expected return."
In conclusion, Ofek says, "This is an unprecedented reform on a global level. Nowhere in the world is there a combination of forecasts in the data that customers receive. This is extremely important because it allows customers to get an impression of possible future effects of interest rate changes and inflation, and this without having to delve into and understand the calculations themselves."
Where do you and the mortgage reform meet?
"Mortgage reform is the flagship project of the governor's tenure, Amir Yaron, and therefore all the relevant departments at the Bank of Israel have been directed towards the goal. The Bank of Israel's image as a regulator for the benefit of the consumer is at stake here," believes Yoni Berliner, chairman of the professional committee at the Association of Mortgage Advisors. "If the reform is successful, it will be the first time, from an awareness point of view, that the Bank of Israel succeeds in increasing competition and bringing about a significant change in the field for the benefit of consumers.
On the other hand, if they manage to communicate the change on the ground, it will be a heavy disappointment, it may prove once again that the banks cannot be forced to guarantee real competition."
Berliner, like many others in the mortgage market, sees great importance in mortgage reform and has high hopes for it.
"The reform has already 'restarted' the mortgage market, and defined new rules of the game. The big banks that led the market - no longer control it, and the small banks got an opportunity to jump into the league of the big ones at once, and at least two small banks took this opportunity with both hands.
"The public of borrowers benefited from availability and fairness. Until recently, in order to receive an answer from the bank with a relevant offer, the customer could easily wait two weeks, and for internal circulation even two months. And now the banks must allow the application to be submitted digitally, and give an answer with a detailed interest rate offer within only 5 business days ", he adds.
The mortgage reform guide
According to the reform, the bank is obliged to present a lot of information to the borrowers so that they can make the best decision for them, but an excess of information may cause confusion, and meanwhile this is what is happening in the field.
What should you focus on, what should you ignore, and what information should you complete on your own?
Together with Berliner, we prepared a guide that simplifies the reform for you:
The mortgage dilemma, photo: GettyImages
How to read the report?
Each mix is presented on a page by itself, and in addition there is a page that summarizes the final data of all the mixes (the first page with the tables).
The two most significant figures in the report are the "total of all payments" (appears in the report as "the total amount expected to be paid by the end of the loan period") and the "predicted total interest" - they actually represent what the economic value of the loan is as of today, based on The latest interest rate and inflation forecasts.
There are three data that the supervision required the banks to present, but they provide only partial information and therefore may mislead and cause unnecessary confusion: the "annual interest rate";
"The monthly repayment is at its peak";
and "is there an early repayment fee".
The data in the approval in principle shows what happens on the first and last day of the loan.
But most mortgages undergo changes or are repaid after about 10 years on average, so it is worthwhile to check on the mortgage calculator what happens during the period, and to do additional simulations.
How to compare?
There is no point in looking at four offers from each bank, with different repayments and different total cost, and start comparing several banks on several different offers.
It's very confusing and there's no reason to compare an offer that doesn't suit you anyway.
Therefore, it is recommended to come prepared, to consult and ask all the banks for an offer on the mix you have decided is suitable for you, and he should conduct the negotiations and demand the best interest rate offer.
Which route will be the most profitable for you?
If you still don't know which mix is exactly right for you, it is most correct and practical to compare between the banks the mix of the third basket, 50% in prime interest and 50% in non-linked fixed interest.
Even if the first basket mix - 100% fixed non-linked - looks like the cheapest mix, you should be careful with it, and not take it without examination and advice.
Because there is a significant fear of early repayment fees of tens of thousands of shekels.
And before choosing this option, you should do a simulation on the amount of the possible future fine.
What about repayment capacity?
Because of the difficulty of calculating the return ratio in the uniform baskets, those who are not sure that they will be approved easily should be careful that their application is not rejected digitally, and this is because the system "remembers" refusals.
If your ability to repay and your repayment ratio is less than NIS 600 per NIS 100,000 loan - you should submit the application through a private mortgage consultant or directly at the branch, so that the consultant will direct you to a more suitable mortgage for you that will not be refused.
If, nevertheless, in such a case you submit the application alone via digital - it is worth asking for the offer of the uniform baskets for a period of 30 years.
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