Moshe Wilshinsky – Mortgages

This Season’s Highs and Lows of Israeli Mortgage Interest Rates and Risks              

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We have seen a significant increase in the interest rates currently offered by the banks in Israel for mortgages with long-term fixed interest rates (e.g. mortgages with terms of up to 30 years). As a means of reference, over the past year there were 30-year fixed-rate mortgages with fixed interest rates of 3.8 %, while today a similar mortgage can be over 5 %. I believe it is important to keep in perspective that even today’s “higher” interest rates are low when compared to the interest rates even five or six years ago. Before I get into what has happened and why, allow me to clarify a few terms. We are discussing residential mortgages, not unsecured consumer loans, auto loans, or loans on commercial real estate. When I say “fixed” interest rates, I am referring to the nominal fixed rate loans available in the market — not the real interest rate loans, commonly referred to in Hebrew as Tzamud L’Madad, which means that the amount you owe to the bank is indexed (i.e. the amount you borrowed after factoring in inflation). So when you get a “fixed” interest rate of 3 % tzamud the bank calculates what you owe on a monthly basis; they will readjust principle and interest by whatever the published Madad is (this is an acronym for an index similar to the CPI in the US). Effectively you are borrowing money at 3 % plus whatever the rate of inflation is for that period. Readers of my articles know that in the majority of situations I am opposed to using any loan that is tzamud and if such a mortgage existed in the US, I do not think it could legally be called a “fixed” interest rate loan (but that is and has been a subject for another article). In this article we are discussing loans that are referred to, not surprisingly, as Lo tzamud or roughly translated “not linked” to inflation.

Allow me to address the question that may come to mind. It has been reported a number of times in the Israeli press that the Bank of Israel will not be increasing interest rates, so how can I be talking about such significant increases? OK, for those of you with that good question, the answer is that those articles were referring to short-term interest rates, namely the Bank of Israel’s prime rate. While increasing short-term interest rates will affect (i.e. cause to increase) the long-term interest rates, long-term interest rates are a market unto themselves and are driven by the interest rates being offered in medium- and long-term corporate and government bond markets.

So what caused this increase in the fixed interest rates on long-term mortgages? I believe there are two factors, the increases in the long-term interest rate markets I mentioned above as well as the profit margin (i.e. the amount of interest) the banks add to those interest rates which determine the amount of interest they will charge on a residential mortgage.

The whole world has been trying to figure out if interest rates are going up, and we have seen in Israel increases in long-term mortgage interest rates that have later gone back down. In Israel one of the most important economic factors is the monthly publication of the Madad LTzarchan. It seemed (and I stress “seemed”) that inflation was, albeit minimally, showing signs of increasing. However, I think it is the margins the banks are taking on 30-year mortgages that have not only increased, but may be signaling a more fundamental shift in supply and demand dynamics in the Israeli mortgage market. Keep in mind that, with the current regulatory framework, interest rates will vary from person to person and even with the same borrower from transaction to transaction based on the perceived risk as dictated by the regulatory parameters. For example, a factor such as strong income – the monthly mortgage payment as a percentage the borrowers monthly income is less than 25 %, the borrower has been earning this income for a few years and it is sustainable in the future – will reduce the perceived risk on a regulatory basis and thereby reduce the interest rate on the mortgage. For the same Israeli borrower, the transaction itself will also affect the perceived risk on a regulatory basis. For example, if our Israeli borrower above purchased a property with a much larger down payment than what is required by regulation, he or she will get a lower interest rate than if they wanted to take the maximum loan with a much smaller down payment.

As I write this article, the inflation statistic is negative for the first time in a number of months and mortgage volume has dropped. As the song goes, “seasons come and seasons go.” So whether the love affair that many of the Israeli mortgage banks have had with the Israeli consumer is taking a cooling off period or whether this is simply a seasonal wave to be corrected in a season or two, we will have to wait and see what will happen.

What is important now, and always, is that anyone looking for a mortgage in Israel should get their expectations in check and understand what options are available in the market in general, and for their situations specifically after taking into account the factors that affect the perceived risk on a regulatory basis. Only then are they in a position to make informed decisions about their mortgage financing.

 

Wishing all our readers a happy and healthy 5777!

 

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