Moshe Wilshinsky – Mortgages

Why Good Economic Times Ahead May be Bad* for Some and Worse* for Others

 

*if they don’t take precautions now

By Moshe Wilshinsky

Many “indicators” are pointing to a stronger economy in the US, to the extent that for the first time the US  Fed (Federal Reserve System) is discussing easing off on the “quantitative easing” (to paraphrase; the US Government is planning on  stopping their practice of effectively subsidizing interest rates ). This has the markets a bit squeamish and searching for what to do in a new interest rate era. For example, over the past few weeks the interest rate on the US treasury bond with a 10 year maturity (i.e. a loan to uncle same for 10 years) has increased at a rate we have not seen recently. The interest rate on this bond is not just important for Uncle Sam’s lenders but it is a key reference rate used for many mortgages and long term fixed rate loans. So when something as basic as the cost of money rises it can have a global effect increasing the cost of everything which creates inflation. Then there is a growing concern that due to the amount of dollars the US has printed over the last few years, rates of inflation not seen since the ’70s may come back . Nothing is for certain and no one knows how far this will go but the feeling we are moving to a new interest rate climate is growing in popularity.

Many assume a US economic recovery will lead the world economy to a recovery as well (so the theory goes) or even if there is not a broad economic recovery internationally it will at least increase interest rates internationally. Simply put, what is going on in the US will have a trickle effect and we are in a buck that may collect a lot of that trickle.

I have mentioned in previous articles that if you are risk adverse it may be time to refinance to a long term fixed interest rate mortgage (not linked to madad of course), but given the situation developing  if you have an interest rate that is linked to madad (inflation) you have two factors that will increase the risk of higher cost of your mortgage. Ironically, the one thing the madad-linked loan does give you is that your monthly payment may not increase as quickly as a mortgage payment based on Prime Interest Rate in a situation where there are significant rises in inflation and there by the Prime interest rate. That is because with the Madad loan your monthly payment is not covering the entire amount you owe every month e.g. the linkage on the principle (yes it is a cost just like interest) accrues over the years that is why after 10 years of making payments you may owe more then you originally borrowed. In many cases it may be time to refinance your madad linked loans and in all cases it is worth looking into.

It is strange but true that good economic times can be bad for borrowers with interest rates that adjust because interest rates increase, but here in Israel where some of those adjustable are also tied to inflation it is like going from bad to worse.

Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd.

Contact information: In Israel dial: 073-796-2226 and then press the special 711 Bizness Magazine extension. In the U.S. dial: 201-377-3418; in the U.K.: 208-596-4501. Website at www.movillefinance.com

 

 

 

 

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