The Bank of Israel is expected to raise its interest rate by an additional 0.25% today, as part of the strongest monetary tightening in the past 20 years.
Israel is in the midst of one of the most aggressive interest rate hikes in its history, and the Bank of Israel is set to further tighten measures by increasing the interest rate by 0.25% to 4.75%. The direct consequence of this interest rate hike is the additional burden on mortgage borrowers, and after ten interest rate hikes in just over a year, the question arises as to how much borrowers will be able to absorb the monetary tightening.
According to calculations, the average mortgage loan (one million shekels over 30 years, 35% prime rate, 30% linked variable interest rate, and 35% unlinked fixed interest rate) has already become more expensive by over 415,000 shekels in total, with the monthly repayment increasing from -3,900 NIS to over 5,000 NIS. The projected increase in interest rates will make the average mortgage even more expensive by tens of thousands of shekels, with a 0.25% increase adding an additional 20,000 shekels to the total repayment, and a 0.5% increase making the total loan 40,000 shekels more costly.
The risk factor that could break borrowers
Are we heading towards a wave of mortgage holders giving up on the properties they purchased and succumbing to the surge in monthly repayments? Credit advisors in banks and the market believe that borrowers are still safe for now, but they also caution about the future. The prime interest rate (currently at 6%) is expected to reach 7% this year, which also marks the absorption limit among mortgage holders.
Similar things are being said in the banking system. “Households have already adjusted to the increase in expenses, so for now, there is no increase in arrears or defaults, and this is due to the fact that the home is the family’s anchor point,” explains a senior bank official. Another source adds, “When we look at problematic debt rates, they are not increasing, and we see a very responsible behavior from the public, so there are no indicators of deterioration. So even absorbing another 0.25% or 0.5% increase, as for the future, I’m not sure we’ll see continuous interest rate increases at the rate we’ve seen, unless there is an uncontrollable inflationary surge, but it seems that is not where we are headed. The market has contained the rise in repayments, and borrowers are starting to realize that the new repayment will become the permanent figure for their mortgage in the near future.”
“Banks are fighting for every shekel”
Moreover, banks themselves are offering various solutions to the public that will enable customers to persist with their mortgage repayments and avoid selling their property. These include interest-free loans, mortgage freezes, and more. “Banks are fighting for every shekel and lower interest rates,” says Vider. “Senior bank executives call us regarding one million shekel mortgages to ask why the transactions are not being finalized and what else can be done to conclude them. I don’t remember banks chasing after every shekel like this.”
For example, just before the Bank of Israel’s current decision, Bank Hapoalim announced that it would absorb the projected interest rate increase for a year, as it did with the increase that occurred last January, and would not make the repayment more expensive (subject to specific conditions such as having a mortgage balance below 1.5 million shekels and a financing rate above 60%).
Mizrahi Tefahot, the largest player in the market, offers borrowers a “mortgage at your own rate” that allows repayment based on the borrower’s capacity, so they can pay a lower amount now, and the monthly repayment will increase later. The bank even offers interest exemption on the principal up to 6,000 NIS to all customers who have both a mortgage and a current account with the bank.
Benleumi, Mizrahi’s main competitor in the mortgage market, has also introduced a series of measures to ease the burden for mortgage holders. On Sunday, the bank announced the possibility of providing an interest-free indexed loan (up to six months’ worth of repayments in the main path of the existing mortgage). For example, if the monthly repayment is 4,500 NIS and one-third of that amount is in the Prime path, you can obtain a loan of up to 9,000 NIS (1,500 multiplied by six months) without interest.
In March, Discount Bank announced a potential benefit whereby customers who choose it can receive an amount equal to the increase in their monthly mortgage repayment on their account from September 2022 until now, up to 1,000 NIS per month. After 24 months, the borrower can repay the amount or spread the repayment over 36 months without interest or fees. There were also advantages internationally, mainly related to longer payment schedules.
But before rushing to accept an enticing offer from one bank or another, be aware that in the financial sector, like any other industry, there are no free gifts. Extending the loan term may temporarily ease the burden for borrowers, but it also increases the total repayment. Thus, deferring payments beyond the mountains of inflation and high-interest rates may be much less profitable than it seems.
