I have written a number of times this year about the long-awaited rise in mortgage interest rates that is now upon us. This rise is not just a result of the increases in the underlying interest rate markets that directly affect Israeli mortgage interest rates, but it was also due to fundamental shifts in the way Israeli mortgage banks are funding mortgages and, more importantly, their approach to the Israeli consumer.
What the mortgage banks are doing is increasing their margin, i.e. the amount of interest they charge over their own costs of purchasing money. Since my last article, this has all come about and has been commented on by the media in Israel, both in Hebrew and in English.
2016 saw Brexit and the election of a new US administration with a different direction and a renewed confidence. The capital markets have concurred that there is renewed hope since the US elections. The US stock market indexes are all up measurably. As I write this article the interest rate on the 10- year Treasury bond is the highest it has been since 2014.
This rise is significant because the bond is the leading index for pricing mortgages in the US as well as for long-term interest rates the world over. Again this can be attributed to the attitude that has emerged post election,that the US economy will grow, thereby forcing the hand of the Federal Reserve to make interest rate increases.
The US elections were not the only political show that everyone was watching; the other political arena was in the oil producing countries, both members and non-members of OPEC. Oil has risen well above its lows of 2016 and, at the time of writing, seems to be going anywhere but down. All of these factors I have mentioned, as well as many more, are creating an environment for mortgage interest rates to keep increasing.
So where does this leave anyone contemplating buying a property in Israel or taking a mortgage on an existing property in 2017? You should keep all this in mind and, when budgeting, make your calculations about what mortgage interest rates you will pay when you eventually buy the property. For example, budget a monthly payment that is higher by one half of one percent more than what you are told is the going market rate. As previously explained, the interest rate you will pay will only be finalized when you actually take the money from the bank. So if you are thinking about it now, by the time you have found the property, have paid your entire down payment to the sellers and are in a position to have the bank fund the mortgage and pay, the balance may be six months, nine months or more away.
While no one can be certain what Israeli mortgage interest rates will be at that time, you need to consider the possibility that, as Israeli mortgage interest rates have increased as significantly as they have in 2016, this may continue in 2017. Every borrower who has an approval, called in Hebrew an “Ishur Ekroni,” or has even signed loan documentation should keep in mind that the probability is that, by the time the bank funds the mortgage (i.e. pays it to the seller’s or to the borrower’s account), the mortgage interest rate will increase — unless of course it was done within a few days of the signing.
But don’t let higher interest rates get you down! The mortgage market changes we are going through are cyclical — not on a seasonal basis — but across a decade or so. This is reflected both in the rise and fall of interest rates as well as the lenders’ behavior. One moment they seem to be pushing money out the door (think of pre 2008!) whilst at another time they are pushing people out the door. (Tried to apply lately?) Fear not! In the scope of things, we are still within healthy historic norms.
It is always important to remember the difference between the Israeli mortgage marketplace to that of the US, UK or almost anywhere else. It is like comparing the experience of someone just starting in their career to a seasoned professional. The Israeli mortgage banks have only been lending from their own funds since 1990 (previously they administered government-funded mortgages), whereas the US and UK have markets that, whilst they have significantly evolved in the past 40 to 50 years, go back more than a century. This is not to say the banks and professionals are not experienced, but to point out that the regulatory framework, industry practices and products in these other countries took many decades to evolve — we are only in the middle of our third decade.
Over the 25 years that I have had the privilege to watch this market develop, there is real movement in government initiatives. Now they are concentrated on first-time buyers, combined with a realization that there is a need for change. This article will be published during Chanukah, an event which, I was taught, was the result of developments over centuries in our national identity and the fight for what it meant to be ourselves. We shone as a nation and, with the help from the One from above, we were victorious.
My hope and prayer is that the regulatory focus will shift from solely protecting the Israeli banking system from systemic risk (e.g. a “2008” type event) to finding ways to enable Israeli mortgage borrowers to responsibly finance the purchase of their primary residence, easily and effectively. I wish all of our readers a Chanukah Sameach.
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