The increase in interest rates, along with high inflation and the increase in bond yields, affect mortgages – both existing and new, in all routes, and the monthly repayment will increase. In recent months, households that have taken out their mortgage are discovering that the repayment, which has become more expensive by hundreds of shekels, which forces them to reduce their expenses Currents, which also became more expensive.
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The first initiative to “make it easier” for mortgage holders came from Bank Hapoalim, which announced that it allows the prime route to be extended. True, apparently a longer spread of the prime route will reduce the monthly repayment, but the longer the mortgage is spread over, the slower the principal repayment rate, and the higher the total cost of the loan. Thus, Bank Hapoalim actually offers mortgage holders to pay less each month, but more in total.
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If banks and policy makers really want to help borrowers in ways that won’t make their mortgages more expensive, there are options to do so.
1. Ease of payment
The various banks in Israel do not have a uniform policy regarding the repayment of the mortgage. In the past, in order to make an early repayment, it was necessary to repay at least 10% of the principal balance that is in the track that the borrower wishes to repay. For example, someone who took out a NIS 600,000 mortgage and divided NIS 200,000 in each route, could pay it off when they only had NIS 20,000, and then enjoy a lower monthly repayment.
Later, the banks decided not to continue to allow repayment in small amounts on the grounds that there is no operational justification to invest time in handling low-volume loans, but rather the repayment will be at least 10% of the entire fund balance, in all routes. That is, the same borrower can only repay if he has NIS 60,000 available.
When the mortgages increased, and the average mortgage reached the amount of one million shekels, early repayment can only be made from 100,000 shekels or more. Today, due to inflation and rising interest rates, some banks allow repayment when there is 10% in each track. But, here too, the increase in the scope of her mortgage leads to routes of up to half a million shekels, and burdens the repayment.
Today, payments can also be made in a fast digital way, so if a borrower wants to pay off NIS 40,000 of the remaining fund, even if there is another half a million NIS on the way. If the banks are really interested in helping mortgage borrowers, they should establish a policy according to which it is possible to make partial repayments, even digitally if they do not wish to incur operational costs, from lower amounts, for example NIS 10,000 or more.
2. Ease of recycling
One of the ways to reduce mortgages is by recycling them, that is, changing the terms of the existing mortgage. For example, if there is a decrease in the mortgage principal and the relationship between it and the value of the property improves, or when there are attractive interest rates in the market. Today, when interest rates have risen, the dream of recycling seems distant, but in a few years, when conditions change, effective recycling can make things easier for borrowers.
There are two ways to refinance your mortgage: internal recycling, that is, at the same bank from which your mortgage was taken, or external recycling – at another bank. While internal recycling is relatively simple, external recycling involves a lot of bureaucracy, which has costs. And if we put it mildly – the banks do not make the bureaucracy any easier, and the customer is required to go back and forth between the banks to submit various documents.
So how can it be made easier for the borrowers in this regard? One of the ways is to facilitate the process of recycling the mortgage. A bill in this regard was submitted in the last Knesset as part of the Click Mobility reform, according to which the mortgage will also be included in the reform, and when recycling the mortgage, the banks will transfer the relevant paperwork between them and make the procedure easier for the borrower. This is only one way to make it easier for mortgage recyclers, but the recycling junction, as it becomes faster and friendlier, will make it possible to reduce loan costs.
3. Reduction of early repayment penalty
When borrowers prepare to take out a mortgage, they must refer to a set of considerations in order to build the appropriate mix – some motivated by risk aversion or love, some by the borrowers’ predictions regarding their financial situation, and some by constraints. In the last month, when interest rates are soaring and all macro conditions are in uncertainty, there is an influx even to the “safest” route – the permanent route. In this route, the borrower transfers all the risks to the bank and pays relatively high interest compared to the other routes.
The fixed interest rate can be fixed but not linked, meaning all the risks are on the bank, or fixed linked, meaning the interest rate itself is linked to the index only, so the only risk the borrower takes on is the risk of the index. In the other routes, on the other hand, the basic interest rate changes according to certain variables, such as the Bank of Israel’s interest rate in the prime route, bond yields, etc.
Alongside this, the fixed interest rate is accompanied by a substantial penalty for early repayment. Thus, if in the future, in a few years, the borrower wishes to change the routes in order to pay less for the monthly repayment, or to refinance her mortgage if the interest rates drop – he will have to face a penalty for the early repayment.
The issue of canceling the early repayment fee in the fixed interest rate has already come up for discussion several times among the decision makers and the Bank of Israel, and many have argued that the existing fee is justified. But there is no doubt that the more flexibility there is in moving between the fixed route and the changing routes, i.e. the cancellation of the fine, the more people will not be afraid to turn to this route in advance, and not go to more dangerous routes.
The credit companies are already charging double digit interest
Consumer loans have often allowed us to think that they are a quick tool to fulfill dreams that are difficult to finance from our current income. The recent interest rate increases make these loans expensive, and you should put the numbers in front of your face in order to understand what the real cost of credit consumption is.
In the credit companies, the margin is on average about 5.5% above the prime (10.25%), and when the Bank of Israel interest rate rises, we are already talking about interest rates in the double digit range. Of course, the amount of the loan also affects the cost of credit, but also the spread, since the longer the spread, the more expensive the loan. Therefore, anyone who offers to spread more in order to reduce the relative monthly payment, is actually offering you to make the loan more expensive in order to pay it back in smaller installments.
For example, if you take NIS 30,000 for five years to replace a living room, according to the terms, you will return a total of NIS 48,900 today. If you take NIS 60,000 for 7 years, you will return NIS 118,000. This is of course assuming that the Bank of Israel interest rate will not continue to rise after today’s increase – an assumption that is unlikely to happen. If the interest rate continues to rise, of course this will immediately make your loan more expensive, and the outstanding balance of the loan will apply to all payments.