Is this the end of an era of cheap mortgages in Israel?
Posted on 02. Feb, 2010 by Buy-It In Israel Staff in Israel Real Estate, Mortgages
Israeli Shekels ©iStockphoto.com/Vladimir Liverts
Interest on mortgages in Israel is set to become more expensive despite the Bank of Israel’s decision to leave interest rates for February unchanged and signs of a moderation in the country’s consumer price index (Madad).
Over the last couple of months, the prime rate rose by 0.75%, as the Bank of Israel started to raise interest rates after keeping them at a record low of 0.5%, while at the same time, the consumer price index surged. The prime rate is fixed 1.5 basis points above the Bank of Israel rate, which currently is 1.25%. AMG, a mortgage consultancy firm explains that these factors led to a moderate start of a rising trend in the interest on mortgages, which is expected to continue over the next couple of months.
As a result of this projection, mortgage consultancy experts are recommending to take out mortgages in the nearest time possible, since rates are still relatively low. At the same time, experts say that the rising trend in mortgage interest has not yet had an impact on the Israel real estate market. Over the past year, mortgage rates have fallen at a record low and as such the expected rise in rates still leaves the market in a relatively low territory.
At the beginning of the decade in 2001, fixed mortgage rates stood at an average of 5% which did not depress the mortgage market. In recent years, three mortgage tracks have evolved as the most popular ones to be taken out by Israelis and foreign resident buyers of property in Israel. One of the most popular mortgages are those that are fixed to the prime rate which is the interest rate determined by Israel’s central bank plus 1.5%. The track is not linked to the shekel or the consumer price index.
Currently the prime rate is fixed at 2.75% and experts forecast an increase in the coming months. Every 1% surge in the prime rate translates into an increase of NIS 260 in the monthly payment of average mortgages of NIS 500,000 spread over a period of 20 years. According to figures published by the Bank of Israel, the adjustable rate mortgages indexed to the prime rate represented 65% of mortgages between January and August 2009, compared with less than a third in 2007.
Another popular track are mortgages that are CPI-linked (Madad-linked) and based on a fixed interest rate, which is determined at the time of taking out the mortgage and does not change. Although changes in the CPI or inflation rate can have a significant impact on the loan, on long-term loans taken out on this track for a period of 20 years, rates have come down recently and stand at 3.5% on average.
The third track, which has recently gained in popularity are mortgages taken out on a fixed interest rate but are not CPI- linked. On this track, the monthly payment is fixed for the life length of the loan. The average interest rate on this mortgage track currently stands at 6.7%. For example, on a mortgage of NIS 500,000 taken out on this track, the first monthly payment will be NIS 3,786. In contrast, on the mortgage track which is linked to a fixed interest rate and the CPI, the first monthly payment will be lower at NIS 2,823 but it is bound to increase over the years in line with changes in the CPI.
In every mortgage there is a risk and therefore experts at AMG recommend borrowers to determine the approriate level of risk they can take before making a decision over one or another mortgage track or a combination of tracks. For example, under the current conditions in the market, it is recommended for a family with a net income of NIS 12,500 wishing to take out a mortgage of NIS 500,000 over a period of 20 years to divide it on two tracks between a fixed prime rate loan (50% to 65%) and the remainder on a CPI-linked track.
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