The worsening inflation in Israel, which has already reached a rate of more than 5% in the past year, is forcing the Bank of Israel to raise the shekel interest rate sharply.
The governor's decision raises the prime interest rate from 4.25% to 4.75% and increases the mortgage repayments to the public by hundreds of shekels starting this Friday, thus drastically burdening households.
Is inflation here to stay?
It seems not.
The Bank of Israel, as mentioned, raises the interest rate to fight inflation (the increase in prices in the economy).
Many economists predict that inflation will return to the Bank of Israel's target of 1-3% in the coming year.
This is of course assuming that there will be no dramatic events that could have an impact.
On top of that, Prime Minister-designate Benjamin Netanyahu promised to freeze the "inflation generators" such as the price of electricity, water, fuel and property taxes.
If this does happen, inflation is expected to drop relatively quickly.
According to Modi Shafferer, Chief Financial Market Strategist at Bank Hapoalim, already in December inflation will begin to moderate and will stand at a 5% annual rate, and in the next 12 months it will drop to a level of 2.7%.
The Bank of Israel interest rate has risen sharply, so why aren't apartment prices falling?
Apartment prices in Israel have risen at a rate approaching 20%, despite the Bank of Israel's interest rate hikes.
The high interest rate only manages to affect a small part of the complex equation of apartment prices - it makes mortgages more expensive, "runs away" investors from the housing market and partially reduces the demand for apartments.
However, the demand for housing continues to increase every year due to the natural growth of Israel's population (about 2% per year), the couples who marry and divorce, and add to that about 60 thousand immigrants from Russia and Ukraine who arrived just this year.
On the other hand, on the supply side, the contractors complain that the high interest rate makes the construction of the new projects very expensive, thus delaying their execution.
Moreover, in recent years there has been a performance gap of about 240,000 apartments from 2017 to 2022, which is only getting wider.
The volume of cash withdrawals from bank ATMs decreased by 5.1 percent, photo: Vertical
How much will the mortgage cost?
The Bank of Israel Governor's decision to raise the interest rate in the economy by 0.5% increases the monthly repayment on an existing mortgage by NIS 128 and completes an increase of approximately NIS 745 within seven months.
The increase in interest increases the total cost of the mortgage by more than NIS 38,000 (over 25 years for an average mortgage), thus completing an increase of more than NIS 223,000 within seven months.
What is recommended to be done with the mortgage if I foresee difficulty in meeting the monthly repayment?
Meir Vader, CEO of Vader Mortgages: "If you foresee difficulty in meeting the monthly repayment, try to reduce expenses or find additional sources of income.
If not, try to gradually use sources of equity kept for savings.
It is less recommended. It is less recommended and it is better to check the flow than to use the savings.
That is, if you have NIS 5,000 in savings, liquidate the money by the amount of the increase in the monthly repayment of the loan each month.
Although it will take a bite out of the savings you have accumulated, it is better than entering into a monthly excess in the bank account.
The method requires financial discipline and it is mandatory to do this in a controlled manner every month."
Bank of Israel, photo: Oren Ben Hakon
Vader adds: "If you don't have liquid savings, look into the possibility of rotating the loans for longer repayment periods that will lower the monthly repayment. It's important to note, the move could lead to the loans becoming more expensive, so it's also important here to consult a professional before making such a significant move."
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