The sharpest rate of increase in the past 20 years brings the prime interest rate to 3.5 percent, only 4 months ago it was 1.6 percent. As a result of the hike, mortgage borrowers are expected to pay additional hundreds of shekels in repayments each month, and a further slowdown in the rate of home purchases is forecasted.
The Bank of Israel‘s Monetary Committee announced this week the sharpest increase in the Bank’s interest rate in 20 years—an increase of 0.75 percent, which brought the Bank’s interest rate to 2 percent. Accordingly, the prime interest rate is expected to climb to 3.5 percent. Only four months ago, in April, the Bank of Israel’s interest rate was still at a minimum rate of 0.1 percent, and the prime interest rate was 1.6 percent. The reason for the continued increase in the interest rate is an attempt to curb inflation as well as the sharp increase in home prices.
The announcement of the interest rate increase came exactly one week after the publication of the Consumer Price Index for July, which showed an increase of 1.1 percent compared with June, and an annual price increase of 5.2 percent. The step also comes against the background of the Home Price Index, which also showed a significant monthly increase of 2 percent and an annual price increase of 17.8 percent at the highest rate in the past decade.
Those who are expected to feel the effect of the further increase are borrowers, primarily those taking out mortgages in CPI-indexed tracks, which are expected to increase markedly. On the day after the interest rate was raised, various calculations appeared in the economic press, demonstrating increased monthly repayments of hundreds of shekels a month for mortgage borrowers.
For example, a calculation carried out by the mortgage consulting firm “Our Way” found that the cost of a mortgage loan of 1 million shekels during a 25-year repayment period is expected to increase by about 100,000 shekels within six months. The data relating to an average mortgage consists of one-third prime interest rate, one-third fixed rate, and one-third variable rate. According to the calculation, the monthly repayments for an average mortgage of one million shekels for 25 years will increase by about 317 shekels per month compared with mortgages taken out About six months ago, those who now take out a loan of 1 million shekels will pay a total repayment cost of about 1.79 million shekels, compared to 1.69 million shekels according to interest rate data six months ago.
According to Maor Ohana, CEO of Our Way, “The increase in the interest rate alongside the increase in housing prices has already caused a drop in new mortgages taken out in August, but there are many homebuyers who previously committed themselves to contractors through the purchase of apartments and postponed taking out a mortgage for future payments, now, however, their expenses now for the total transaction will increase by tens to hundreds of thousands of shekels. In addition, there is the entire mortgage-taking public that will now pay hundreds of shekels more every month.”
Special attention was given in the coverage to those who have purchased subsidized apartments as part of the government’s schemes, since many of them undertook to purchase apartments with almost no equity while taking advantage of the possibility of taking up to 90% by way of a mortgage, in contrast to the Bank of Israel’s restrictions on regular home buyers, which require the minimum provision of 25% equity. Due to the high leverage rate of this group of purchasers, it was marked as a high-risk population. “For those couples, especially those who have not yet received their apartment and are paying a mortgage at the same time as rent, this is a difficult economic verdict and it is doubtful whether everyone will be able to afford it,” said Ohana.
Beyond that, expectations in the market now are, of course, for a noticeable slowdown in the volume of home purchases following the measure, which may eventually lead to a slowdown in the rate of increase in home prices, and perhaps even to a halt in price increases. It should be noted that so far the price graph has not shown that it is affected in any way by previous interest rate increases when only a week and a half ago the home price index increased by an additional 2 percent. However, it appears that the Governor’s decision to raise the interest rate by such a sharp 0.75 percent at once was intended, among other factors, to create a shock among Israeli consumers and home buyers. In about two or three months from now, we will know if he succeeded.
