The jump in mortgage interest rates since the beginning of the year requires recalculating the amount and mix of her mortgage, for a number of different reasons: feasibility, risk and regulatory limitations. Now, the increases in interest rates, which increase the monthly repayment, cause borrowers to run into the monthly repayment limit. One of the conditions for receiving a mortgage is that the borrower’s monthly repayment cannot exceed 40% of the household’s disposable income, while most banks have defined a lower internal limit – the monthly repayment cannot exceed a third of the household’s disposable income.
Why was the limit set? In order to create a balance and leave enough current money for life itself. If all the disposable income is directed to the repayment of the mortgage, the household will find itself in a cash flow crisis, in the red, and its stability will of course be undermined.
The increase in interest rates and the monthly repayment made this limit challenging. Let’s say a young couple wants to buy an apartment worth NIS 2 million. For the benefit of the new apartment, they took a mortgage of 1.3 million shekels (this is not the maximum mortgage they can take according to the limit of the percentage of leverage on the property, but the meaning is that they managed to raise about 700 thousand shekels for equity). According to today’s interest rates, this is an average return of NIS 7,500 per month, before increases brought about by the linkage factors.
When taking out a mortgage, after we have already found an apartment that we like and come across the available income limit, there are several ways to deal with it, you just have to be aware of their cost, and whether they will not put you in cash flow difficulties in the future.
The extension of the tracks
A longer spread of the repayment of the mortgage allows the reduction of the monthly payment. Thus, instead of paying a certain amount for 20 years, you will pay a lower amount each month over 30 years.
However, there are no free gifts. If the mortgage repayment period is extended, its cost increases. The increase in price can be obvious, for example in a non-linked fixed interest rate, the interest will be higher because the interest is always charged on the unpaid balance of the loan, so the slower the mortgage is reduced, the higher its cost. In general, extending her mortgage from 25 to 30 years makes it significantly more expensive. Therefore, if you extended the mortgage term in order to avoid the disposable income limit, it is very worthwhile to consider shortening it when possible along the way.
Attaching the mix
The logic is simple: whenever you choose to remove risks from yourself, you will pay a higher interest rate. The only regulatory limitation you must take into account is that one third of her mortgage is at a fixed interest rate.
A non-linked fixed interest rate, which will be more expensive than a linked fixed interest rate – in which the risk of inflation is on you. The more expensive the interest rate, the higher the monthly repayment will be, and in order to meet the monthly repayment limit, many tend to take a riskier mix and mortgage it in long-term linked tracks – both with fixed and variable interest rates. Inflation for 30 years is something difficult to predict, and it is very important to understand in depth what risks you are taking on in such a scenario.
evening income
Another way to overcome the monthly repayment limit is to put in a guarantor. However, it is worth noting that if in the past it was possible to give the bank a guarantee that would be realized only in emergencies and the borrowers themselves paid off the loan, today the conditions have changed. As part of the calculation of the borrower’s disposable income, 50% of the guarantor’s disposable income can be recognized for the purpose of meeting the limit. For this, he has to be close to the first degree, pass the repayment ability test conducted by the bank for the borrowers themselves, and pay 20% of the monthly repayment himself on an ongoing basis.
Capital increase
The last way to meet the limit is of course to increase the capital and reduce its mortgage. If you managed to raise more capital, then this means that your obligation is small, as is the cost of its mortgage and the monthly repayment. However, if you chose to supplement your equity through an additional loan from a third party that will serve as your equity, and this loan is more expensive and shorter than its mortgage, note that you can indeed meet the total repayment amount of all the credit you have taken on yourself.
In most cases, the loan repayment will be deducted from the calculation of the disposable income of the household, and it is not at all certain that in this situation you will be able to meet the limit.