The interest rate in the economy increased by another 0.5% yesterday and the interest rate in the economy already stands at 4.25%, the prime interest rate on mortgages already stands at 5.75%. The result is a jump of NIS 1,000-1,500 in the monthly repayment of your mortgage (for expansion). Of course you don’t need us to know this, you feel it every month in the jump in your expenses, when on the other hand the incomes have not increased. In fact, your monthly mortgage repayment jumped by 20-40%, quite a bit. You might also grab your head and say to yourself ‘Wow, what trouble have you gotten yourself into. We just wanted an apartment.’ That’s true, but along the way you didn’t check how much your return would jump when the interest rate in the economy rises – and it was only a matter of time.
But you can’t cry over the past. Now you have several options – sell the apartment (wait, we’re in Israel, this option supposedly doesn’t exist. No one seriously considers it. You’ve been told all your life that ‘housing prices only go up’ and in general – in Israel everyone wants to ‘get to an apartment’) , to ask for help from friends or parents, but they are also in the same boat, and are also dealing with the increase in interest and the jump in repayments. You can also take another ‘supplementary’ loan in the non-bank credit market, in order to be able to meet the repayments to the bank (but the interest rates in the non-bank credit are for short periods and the interest rates there already reach more than 10%)
Then, when you don’t know what to do anymore, you get the phone call from the bank – “We have a magic solution for you,” says the clerk: “Re-deploy the mortgage, which means you will pay the mortgage for more years, but your monthly repayment will drop back to what you knew before a year, before the interest rate increase”. And suddenly it makes sense to you. Actually why not? We already pay the mortgage anyway, so why not extend it and lower the monthly repayments? At least it will be easier for us…
But before you say ‘yes’ to the nice clerk. You should think about something else: that nice clerk who called you is a salesperson. His job is of course to sell you a product and generate more income for the bank, more money. Where will this money come from? Of course – from you, from your bank account. In the last decade, when the interest rate in the economy dropped to zero, the banks did not chase you and did not offer you such generous offers of mortgage recycling when the interest rate dropped. They did not offer you to lower the interest rate and pay less (in the total repayment). Why are they suddenly so nice?
The story is simple – when the interest rate was lower, if you recycled the mortgage, you would pay the bank less money in the total calculation, because the interest you would receive from the bank in the recycling process was lower. But now it’s the other way around – the interest rate in the economy is rising, so when the bank offers you, with all its niceness, to spread the mortgage over more years, it’s actually telling you to give me more money. I will give you the money for more years, but it will cost you a higher interest rate. In fact, this is an addition of NIS 35-60 thousand to your total mortgage repayment.
That is – you earn a monthly reduction in payments, but leave with cumulative damage over time of a much higher cumulative payment than you intended. Here are the numbers, courtesy of Avi Amsalem, a financial planner and partner in the planning firm Triplan:
Examples in money:
A family that has a mortgage of one million shekels with 40% in the prime route (400 thousand shekels) and wishes to reduce the monthly repayment by 200 shekels while extending the mortgage by 3 years will pay a total of another 36,000 shekels in repayment to the bank on the mortgage. If she wants to extend the mortgage by 5 years, she will be able to lower the monthly repayment by NIS 300, but will pay for it with an increase of NIS 62,000 in the total mortgage repayment.
A family that took out a NIS 1 million mortgage but was smarter and only took 25% in the prime route (250 thousand NIS) will be able to save 120 to 190 NIS in the monthly repayment if you spread the mortgage over 3 and 5 years respectively, but it will cost them 27 thousand NIS in the event of 3 years and NIS 45 thousand in the case of a 5-year extension of the mortgage.
Is there an alternative?
Now, you may have no choice. You might say, ok, we understand that we actually ‘ate her’, that we jumped over the navel, that we took out a mortgage that was several sizes bigger than us, but we have no choice but to spread the mortgage. You may be right, that when you look at all the options you have, you really feel and are sure that this is the right option for you. Just before you decide on this – remember that there are other options, that you can first of all reduce expenses, expenses that you feel are ‘must’ but in fact you can manage without them. Maybe you can consider giving up one car, giving up a vacation a year, or reducing it, eating out less (or not eating out at all and preparing food at home), giving up on the renovation of the apartment you just dreamed of doing, carrying around a little more with that old refrigerator, saving more every month. Another option is to take another extra job, work more hours to finance it. If not – we will return you to the first option above: sell the apartment.
Now you are really angry and say to yourself – wait, what is he talking about? Does he want us to ‘get together’? You only live once, how can you give up all these things? How can you take on another job, we are already working too much and too hard? And we will come back and say – we completely understand you. Obviously it’s annoying and it’s hard to go down from the standard of living you’ve gotten used to. We don’t tell you what to do, but the equation is simple: you must increase income or decrease expenses, or both. Any way you do it is already your decision, the options are in front of you, but you have to choose the solution that in the end will not financially disinherit you and will not cause you to enter a spiral of debts that you do not know how to get out of. This is the goal and you need to get there.
And a final word – with a hand on your heart, you already made the wrong decision a year or two ago. You entered into a mortgage adventure that was several sizes bigger than you. Today you are just paying the price of that problematic decision. Ask yourself now – when you decide now to spread the mortgage over many more years, are you making a decision that is more correct for you, or did you get into a dead end following a previous wrong decision?