The interest rate in the economy continues to become more expensive and it already hurts the pocket of everyone who bought an apartment in Israel in recent years and pays a mortgage every month. As a result of the increase in interest rates, mortgage repayments increased greatly from NIS 500 to NIS 1,500 or more. A lot of money. It makes it very difficult for the families and it is difficult to meet the payments and finish the month.” But, what are the complaints actually about – everyone should have known that this was going to be the case.
Dear David Hello, this is the BizPortal system. We read your comment and feel the pain you are expressing here, but you should have known this is what was going to happen – the world could not stay at zero interest rates for so long. We are back to “the normal interest rate”. This should have been emphasized to you at the bank, the mortgage advisors at the banks should have presented you with the risks of increasing the mortgage repayment and accordingly determine and spread your mortgage over different routes.
David, the truth is that the story here is much bigger than you – in total, 530 thousand families in Israel took out a mortgage in the last 5 years. How many of you are asking yourself the same questions you are asking? Probably a lot. The problem: The public doesn’t understand what they are signing when they take out a mortgage, and the banks obviously don’t bother to explain it clearly.
So here is the explanation: When you sign a mortgage you are actually signing a contract with the bank. You take on a certain risk and the bank takes on a certain risk. The part of the fixed interest rate (KLC) is a risk that the bank assumes. The bank makes a commitment to you that no matter what happens in the market (interest rate increase or inflation) you will continue to pay the exact same amount on this component. Another route is ‘interest rate changes every 5 years’ – Here too, the bank assumes the risk of inflation and interest for 5 years, and then your interest rate will change according to the changes that will occur and the risk will be transferred to you. Along the way, the bank is the one that will absorb the changes.
And what about the prime interest rate track? Here the risk is entirely on you. When you took out the mortgage you signed – yes – this is the truth, if the interest rate in the economy rises you will pay more money to the bank. This is exactly the meaning of a variable prime rate track – the interest rate in the track varies according to the prime rate, which is defined as the Bank of Israel interest rate plus 1.5 percentage points (currently the Bank of Israel interest rate is 3.75%, so the prime rate is 5.25%. A year ago, the Bank of Israel rate was 0.1%, so the interest rate The prime was 1.6%). Therefore, when the interest rate in the economy has increased now you pay more interest. If you will, David, ‘the interest rate risk has materialized’ and therefore you pay more. You signed in advance that you commit to this. Just like you sign a lease with a landlord, or buy a product and pay in installments, or make any other payment you can think of. Of course, this is also the case if you just take a loan that is not a mortgage.
But we need to say more than that – even if the banks explained to you the effect of a 4% interest rate increase on your mortgage clearly – and you would seemingly see the danger right in front of your eyes – we estimate that you would still take the mortgage. surprising? Not at all. Suppose the bank were to explain to you that if the interest rate in the economy rises by 4%, you will pay another NIS 1,500 per month. If you think about it – even if the bank told you about such a scenario, what would you do? Not buying the apartment? you would buy Maybe you would take more of a fixed rate mortgage, but many did that and over the years paid very, very high interest rates (the fixed rate by definition is higher than the variable rate).
The bank may have also warned you at the time, but presented the other routes that were expensive and also possibly reassured you – in the future, your salary will probably increase and you will be able to manage.’ That is – We assume when we sign a mortgage to buy an apartment that the danger doesn’t seem big and tangible, so much so that we give up on the whole story and continue to live in a rental. Also don’t forget – we made a lot of money from the rise in apartment prices in recent years, probably David too. He laments the increase in repayments, but David now has a property that has increased by tens of percent.
Responsibility to check and understand the mortgage
If you rush the bank and or the investment advisors with the mortgage and don’t find out and check, you are in trouble. You may be angry at the bank for not explaining the risk in depth, you may be angry with yourself for not understanding the meaning of the variable interest rate and learn the lesson for next time. Before signing a financial issue, you need to understand it. No one will do it for you.
The bank is not really your partner, it is the lender, you are the borrower, the customer, it profits from you. The interest of the bank is to receive as much money as possible over the years. It’s his business. Whoever takes out a mortgage now probably thinks and studies the subject more seriously than in previous years. It’s natural, it’s more in the news, more is talked about, more is heard about the pain of people like you who ‘ate it’ and have to pay a lot more money every month for the mortgage.
When interest rates rise and repayments rise, then it becomes more important to understand what you are paying for, although a mortgage has always been the average family’s largest payment. And the interest rate at Alibaba Bank of Israel is expected to continue to rise.
Why is the Bank of Israel raising the interest rate? Because he must stop inflation at all costs. And that’s not over dramatic
The Bank of Israel raises the interest rate because it knows that high inflation is much more dangerous and destructive to you David and to all of us than any painful and high monthly payment on the mortgage. You’re probably saying to yourself right now, ‘What? What could be worse than these extra 500 shekels that collapse and suffocate me’. But the truth is that these 500 shekels are perhaps your punishment for not knowing and not understanding what you were signing, but it is a very light punishment (relatively) for the disaster that would have happened to you if all Your money would begin to be wiped out.
what are we talking about? In the USA this year inflation reached 10%. This means that every NIS 100 you had at the beginning of a year was worth NIS 90 at the end of the year. After another year they were worth NIS 80 (approximately), after 3 years they were worth only NIS 70 and so on. In fact, within a few years all your money simply evaporates and is wiped out. Everything you have is worth much less, you suddenly need NIS 150 to buy what only a few years ago would have cost you NIS 100. This is the meaning of inflation – erosion of the value of your money. Today in Turkey inflation is at 80% per year. This means that every 100 shekels at the beginning of the year is worth only 20 shekels at the end of the year! That’s it. Money in Turkey is no longer worth anything.
But you don’t have to go all the way to Turkey. In Israel for decades inflation was 20% or more every year. In fact, from 1970 to 1996 it is hard to find a year where inflation was not in double digits, every year every year. In the 1970s, there was an inflation of 40-50% every year (each product that cost NIS 1,000 in 1970, after 8 years it cost NIS 9,700, that is, inflation of 868% cumulatively).
The peak was reached in Israel in the 1980s. Inflation reached more than 100% per year, Every year, between the years 1979-1985, when at its peak it reached 445% in one year. To illustrate: if a product cost 1,000 shekels in 1979, then to buy it 6 years later you had to pay about 1.55 million shekels! Or – a 155 thousand times jump in prices within this short period of time.
Simply put – it means your money was worth nothing. It evaporated (literally) within a few years. Here is the calculation from the CBS website:
Do you think that inflation is too high, and there is no way we will ever reach it again? It’s possible. No one wants to take that kind of risk. But even if we take a ‘more moderate’ example, the years 1992-1998, when inflation was about 10% per year (as mentioned – as it was this year in the USA), So the cumulative inflation in these 7 years was a cumulative 94%. That is, every product that cost NIS 1,000 at the beginning of the period, cost NIS 1,940 at the end of the period. Yes, twice with annual inflation of approximately 10% ‘only’ (here is the calculator on the CBS website – you are welcome to check for yourself).
So true, you are not ‘hurting’ the market. The story is not you but macroeconomics – inflation needs to be stopped when it starts to rise. No one dares to dream of inflation like it used to be in Israel. No one is hurting you and no one is trying to hurt you, but you probably already understand that high inflation is much, much, much more dangerous for you as well than the increase in the repayment on the mortgage. Right?
Who earns this money? Ok, it is true that the banks earn a little more (and maybe more than a little). But that’s not the goal, that’s the result. Just like what happens to your mortgage. The goal of the Bank of Israel is to reduce the amount of money in the economy, to reduce the public’s demand for loans, companies’ demand for financing, and more. In this respect, you are only a small part of this whole big puzzle. The Bank of Israel looks at the macro to save the country from the danger that Charlie Menger, one of the world’s largest investors and Warren Buffett’s partner, another legendary investor, called: “Inflation is a very serious issue. You can say that this is the way democracies die.” no less.
Towards the end, we will come back and say – we are very sorry for what is happening to you now. But the story here is much bigger. You won’t forego life-saving surgery just because it hurts. And this is how this subject of the surgical treatment of inflation should be treated.
Fortunately for you, the prime interest component of your mortgage is relatively small. Some people took mortgages with a prime component of 50%, and they ‘ate’ it much more. Their reimbursement also jumped by NIS 1,500 a month.
In the meantime, here are real estate transactions from the past week:
Ramat Hasharon
5-room penthouse on 5 Ramez Street in Ramat Hasharon, 135 square meters built, 150 square meters roof, floor 6 out of 6, with elevator and parking, sold for NIS 6.05 million
Holon
3-room apartment, David Shimoni Street, Kiryat Havoda neighborhood, 90 square meters, 2nd floor of 2, 10 square meters warehouse, parking, sold for NIS 2,110,000
ת״א
2-room apartment, Derech HaShalom Street, 56 square meters, 1st floor out of 3, sold for NIS 2,360,000
Be’er Ya’akov
4-room mini-penthouse on Sha Nes Street in Beer Ya’akov, 133 square meters + 20 square meters balcony + 6 square meters warehouse, 12th floor out of 13, with elevator, 2 parking spaces, sold for NIS 2.83 million
Efrat
Corner cottage 8.5 rooms on Zakaria Street in Efrat, 245 square meters, gardens about 100 square meters, small warehouse (about a meter), no elevator, no parking, sold for NIS 3,450,000
Afula
6-room apartment, Hatzir Street, 156 square meters, 3rd floor out of 8, parking, elevator, sold for NIS 1,280,000
4-room apartment, Jezreel neighborhood street, 140 square meters, 7th floor out of 9, parking, elevator, sold for NIS 1,290,000
5-room private house, Esther HaMalka Street, 162 square meters built on a 414 square meter lot, 2 parking spaces, sold for NIS 2,940,000
Pardes Hana
4-room apartment on Derech Habanim street in Karkur, 100 square meters + 12 square meters balcony, 4th floor out of 5, elevator and parking, sold for NIS 2.21 million
Beer Sheva
3-room apartment, Derech Masada Street, neighborhood V, 76 square meters, 2nd floor out of 4, sold for NIS 920,000
5-room private house, Halutz Street, Old City, 140 square meters built on a 240 square meter lot, parking, sold for NIS 2,040,000
9-room villa, Operation Horev street, neighborhood V, 200 square meters built on a 400 square meter lot, parking, sold for NIS 2,590,000
4-room apartment, Nahal Ergot Street, Park neighborhood, 110 square meters, 20 square meters balcony, floor 1 of 5, parking, elevator, sold for NIS 1,825,000
earing
5-room apartment, 105 square meters, 15 square meters balcony, 4th floor out of 4, parking, elevator, sold for NIS 1,650,000
4-room apartment, Ehadot Street, 98 square meters, 12 square meters balcony, 3rd floor out of 9, parking, elevator, sold for NIS 1,560,000
Hadera
3.5 room apartment, Rabbi Kook Street, 78 square meters, 1st floor out of 4, sold for 1,390,000 NIS
The data was collected from Rimex, Anglo Saxon and the Tax Authority data.