By Moshe Wilshinsky
On November 26, 2018, the Monetary Committee of the Bank of Israel (BOI) decided to increase the interest rate from a rate of 0.10 percent to a rate of 0.25 percent. This rate has not been increased in a long time (about seven years) and caught many analysts by surprise. Considering that interest rates in the US have been increasing for a while, we may be seeing a long-term shift upwards in interest rates in Israel.
I imagine you are asking yourself: Why do rising interest rates in the US concern someone living in Israel? That’s a good question. The answer is because in today’s global economy, the US is the world’s largest economy. In fact, the BOI press release cites, among other factors, what is happening in the US.
To better understand where we are today a little historical context is needed because historically with such shifts, the mortgage qualification process is adversely affected. As a result of 9/11 and the stock market crash of 2001 (often referred to as the “bursting of the Internet bubble”), the Federal Reserve, which is the central bank of the US (the FED), repeatedly lowered short-term interest rates to historic levels. In 2008, the world financial markets suffered one of their worst crashes. As a response, the US and other governments around the world enacted Quantitative Easing, a monetary policy where the government buys its own government bonds, which keeps demand high thereby lowering long term interest rates (a bond’s value and interest are inversely related). This monetary policy created what is commonly referred to as “cheap money.” The cheap money enabled businesses, government bodies and consumers to borrow more than ever to acquire assets and utilize resources. This, in turn, helped jumpstart the economy, especially in the US, which, immediately after 2008, many were afraid was on the brink of an economic depression.
The post 9/11 interest rate drops affected the Israeli mortgage market as well lowering interest rates and increasing loan amounts. Just when everyone thought rates would start increasing, 2008 brought Quantitative Easing as a response. This maintained the lower interest rates in many countries; while in Israel, even though Israeli mortgage interest rates remained low, the BOI introduced many mortgage regulations and one of the effects was limiting the size of the mortgage a borrower can get approved for. In the past few years while there were periods where long-term and mortgage interest rates in Israel increased, they would go lower as well in part because of the lower interest rates in the rest of the world, especially the US.
The Fed has been raising interest rates on a regular basis for a few years and recently made it clear it is ceasing Quantitative Easing. At this point, in the US, the sentiment about interest rates is more one of wondering how far interest rates will go up than if they will drop long term.
The situation in Israel isn’t as clear. Although the interest rate that the BOI just increased is the leading interest rate index, and even though it’s a short-term interest rate, the fact that they increased it may cause the market to increase long-term interest rates as well.
One of the ramifications of all this is called interest rate risk. For a borrower, it means the possibility of interest rate (i.e. cost) increases and higher monthly payments on adjustable-rate mortgages (or parts/maslul, thereof). For a lender, it means less profitable mortgages.
The Basel III regulatory framework, another 2008 by product, actually discusses interest rate risk and the importance of taking it into account. Regulators like the BOI base their regulations on the Basel framework. For example, how banks take into account the possibility of variable interest rates going up in the future in the approval process can affect the loan amount a borrower can qualify for. If the Israeli mortgage banks start to assume the inevitability of the BOI increasing interest rates, mortgage banks will increase mortgage interest rates in anticipation of those future increases.
In the month following the BOI rate increase many things changed. The US stock markets have lost significant value, which caused the interest rates in US bonds to drop and the new governor of the BOI has been quoted as saying: “It is important that the interest rate is not raised too rapidly or aggressively.” So, in fact, no one knows if, when, or how high mortgage interest rates will rise, but it’s a real possibility and mortgage borrowers, both current and future, should be prepared because with mortgage interest rates, what goes up does not always come down.
For anyone with a mortgage that has a portion of it with a part (maslul) linked to the Madad (CPI) or has an interest rate that is adjustable, now is a good time to see if it makes sense to refinance to a fixed non-linked interest rate mortgage. For anyone thinking of getting a mortgage in the future: budget for higher interest rates. You also may face more scrutiny in the approval process.
I would like to wish a warm welcome to Professor Amir Yaron, the new governor of the Bank of Israel. May you have hatzlacha and bracha in your new position so we can as well.
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd. Moville Mortgages can found on the web at www.movillefinance.com.
They can be reached at 073-796-2226 ext. 711. In the US, dial 201-377-3418; in the UK, dial 208-596-4501.