The interest rate hike and the inflation rate in Israel have two main consequences for mortgage loans: those who have mortgages already will have to make higher monthly repayments; and some of those planned to take a mortgage loan will discover that the amount that they can borrow has shrunk. Still, the banks recommend keeping a sense of proportion.
“The rapid rise in interest rates have led to headlines about rises in monthly mortgage repayments of NIS 1,000, and that’s not a true picture. It does not reflect the situation of a very large proportion of customers who have taken mortgages,” says a senior mortgages manager at one of the banks. “The variable-rate, prime-linked component of a large proportion of mortgages is less than 50% of the total loan. So while monthly repayments have clearly risen, in most cases it’s by much less than what various people are trying to describe.”
Banks exploiting the situation
According to the calculations of the National Association of Mortgage Brokers, this week’s 0.75% hike in the Bank of Israel’s key lending rate means a rise of NIS 177 in the monthly repayment on an average mortgage (a NIS 1 million loan for 25 years). The interest rate rise also entails a rise of about NIS 53,000 in the total cost of an average mortgage.
Altogether, since the Bank of Israel started raising interest rates in April, the monthly repayment on an average mortgage has risen by NIS 432. The National Association of Mortgage Brokers says, however, that the banks are exploiting the situation and widening their spreads, so that someone who takes out a mortgage loan today is paying more than the recent interest rate hikes warrant by themselves.
“A person has to check the consequences of the rise in interest rates and in the Consumer Price Index, but not under pressure, because not all of the mortgage loan they have taken is linked to the Index or to the prime interest rate,” says Ariela Rendelstein, head of mortgages at Bank Hapoalim.
The average composition of a mortgage in Israel is 40% at a variable rate based on the prime interest rate; 30% linked to the Consumer Price Index (CPI); and 30% fixed rate, unlinked.
The rise in the CPI weighs on the index-linked mortgage track, so that monthly repayments have also risen on this component. The rise in interest rates and the rise in the CPI affect borrowers differently, however. The rise in the CPI affects the balance of the loan principal, and so the effect is chiefly in the long term, whereas the rise in interest rates has the direct, painful effect of higher monthly repayments on the variable rate component of the loan.
Lower mortgage ceiling
The rise in repayment levels should have an impact on the PTI (payments to income) ratio. The Bank of Israel has not yet published figures for July, when its interest rate was raised 0.5%, but this ratio had already risen significantly before then.
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In June this year, 44% of mortgage loans taken were with monthly repayments at 30% of the household’s monthly income. This is a peak for recent years, but not an all-time record. Ten years ago, there months in which the PTI was higher. The two periods have in common relatively high interest rates.
In general, mortgage loan levels will probably change in the near future. In June, homebuyers in the open market who were not investors took mortgage loans averaging NIS 1.055 million, 9% higher than in June 2021. The average mortgage loan taken by investment buyers was NIS 939,000, 18% higher than in June 2021, while buyers under the subsidized “Buyer Price” program took mortgage loans averaging NIS 714,000 in June this year. Will people taking mortgage loans in September be able to reach these levels? Almost certainly not.
Take, for example, a couple with monthly disposable income of NIS 12,000. Six months ago, they could have taken a mortgage loan of NIS 1 million. Today, if that couple applies to the bank, it will be told that it can take a maximum loan of NIS 850,000.
A household that wanted to take a NIS 1.5 million, 25-year loan at the beginning of the year, comprising 45% variable rate, 35% fixed-rate unlinked, and 20% CPI-linked, had to repay NIS 6,470 monthly and had to have a monthly income of NIS 17,000. The very same loan now entails a monthly repayment of NIS 7,880, and requires monthly income of NIS 21,000.
What about those with mortgages already? Meir Vider, owner of mortgage broker Vider Mortgages, recommends reexamining the fixed-rate track, which until recently many people tended to overlook because of its relatively high interest rates. The differences have now narrowed, and this track ensures borrowers a certain way forward that is proof against ups and downs in interest rates and the CPI. “The fixed rate for unlinked loans is currently 4-4.5%, and suddenly that’s not far from the prime-based rate,” he says.
Rendelstein mainly recommends not acting in a rush or under pressure. “There are customers whose mortgage repayments have risen, but they can meet them. I don’t recommend rescheduling the mortgage or doing anything hasty that will incur further costs.
“Anyone who feels in difficulty has various possibilities, and they can look at what can be done. For example, many people who have taken mortgage loans on the prime-based track have not taken advantage of the maximum period. They can exercise the option of spreading the loan over a few more years, in order to reduce the monthly repayment.”
Published by Globes, Israel business news – en.globes.co.il – on August 24, 2022.
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