This week, the Bank of Israel lifted the restriction on taking out a prime-linked variable-rate mortgage. If until now it was possible to take a third of the mortgage amount in a prime-linked route, now it is possible to take a double amount – up to 2/3 of the mortgage. Is it good or not good? The question is to whom, and in what dosage.
The mortgage field is the most competitive field in banks. A person who takes out a loan of almost NIS 1 million bothers to bargain because with such a large loan volume, any reduction in interest rates has very high financial implications. Because the field is so competitive, any removal of any restriction by the Bank of Israel, including a 1/3 Prime limit, by definition will play in favor of the customer. It allows him greater flexibility and proper adjustment of the mortgage to his needs, which in the end will also be reflected in the money. But in order to understand where you can profit from this and how – let’s first understand how to build a winning mortgage.
Read more in Calcalist:
1. Wait with interest rates: The story is in the mix
A mortgage is taken out in a number of tracks, each with a different linkage that affects the change in interest rates over the life of the loan. Each route is exposed to other risks, and it also has different characteristics in front of the customer: for example, some routes have exit fines and some do not, some are more flexible and transparent and some less so. The 3 most common tracks are: Prime linked track, in which the interest rate varies according to the change in the Bank of Israel interest rate (Prime interest Is the Bank of Israel interest rate + 1.5%); A track in which the interest rate is fixed for 3 or 5 years, and then varies according to the change in the anchor set by the bank, linked or unlinked, according to the customer’s choice; And a fixed-rate route – which can be linked, and not linked;
If you go to request several offers from several banks to check the interest rates they will offer and bargain for them, you will probably receive the same standard offer – one-third prime, one-third variable every 5 years and one-third fixed – and soon, following the change initiated by the Bank of Israel, And a third close. Apparently, no matter what the interest rates will be, this will be a bad offer for you. The big money and significant planning of the loan is in choosing the right mix. In fact, one of the strategies for taking out a mortgage is to reach out to banks with the right mix for you, and ask for various offers for it, and from there start the negotiation process. How do we do that?
Photo: shutterstock
2. Understand that the bank will always be smarter than you
When you come to the bank it looks at your risk profile as a long-term lender, and from that deducts your risk pricing (and as a result: how much it wants to earn on you). He has a number in mind, and he can negotiate or give up on you, but for him – the mortgage is one package. That is, if he offers you a third linked prime with a prime interest rate – 0.5%, because this is the cheapest route, if you ask now 2 / 3 prime-linked track, you will not receive it in this interval.In fact, in the market it is estimated that you will receive it in prime + 1%. Nothing, no matter how you arrange the tracks, the bank’s total margin from the mortgage will be similar.
So if in fact when we take more money in the prime route, the interest in it will go up, what have we done about it? Well, the bank may be smarter than you, but you have a lot more information from it about your life development prospects. For example: if you know that you are going to repay the mortgage very quickly (an apartment purchased for a flip investment for example), then it is worth taking more money on the prime route, because there are no exit penalties; Or, for example, if you are undecided between a mortgage divided into three tracks: a fixed third, a third changes every 5 years at an interest rate of 2.6% and a third prime at a prime minus 0.5%, and a third of a fixed interest rate and two-thirds at a prime interest rate of + 1%, but you know that within a year You will receive a sum of money that will allow you to close the variable track every 5 years, and stay with Prime minus 0.5% for further repayment.
This strategy is called a “seduction route”. You entice the bank to give you very attractive interest rates on certain routes at the expense of one bad route, but you know that this is a route that you will close in a short time. Therefore – not always taking 2/3 frame would be the right strategy.
3. Bottom line, this is long-term risk management
We talked earlier about a strategy of building a mix yourself, with which to approach the bank. How to build a mix? The way is risk management, but here we are doing risk management for decades. You will need to think about the trajectory of your life: Are your expenses going to go up soon? Children to come? Or maybe the other way around – now there are small children, and soon the private frameworks will end and expenses will go down? Is there an expectation of receiving funds that will allow early repayment of part of the mortgage? Is there an expectation of a wage increase? For example, now you are a student and you expect to become a hitmaker? Are you going to pay the mortgage off in full or is it a rolling investment, so early repayment penalties play a role? Do you have any other debts, such as loans for equity for the apartment and renovations, that you expect to be completed, and when? Once they are completed will you be able to increase your monthly mortgage repayment? And also – how much will it bother you if the monthly repayment changes? Is this something that can weigh heavily on the household?
Residential construction Photo: Shaul Golan
When building a mix there is a trade-off: the less risky the route – the higher the interest rate. Thus, an unlinked fixed interest rate will be the most expensive interest rate you will receive, compared to the prime track (where the interest rate can change frequently), where you will have the cheapest interest rate you will receive. On the other hand – even if you really hate risk and you want to take everything at a fixed interest rate, you will probably encounter another limitation – and that is the monthly repayment (limited to no more than a third of disposable income), so there will always be a balance between more expensive and cheaper.
Another balance to consider is the risks: this is a 30-year mortgage, so the more risky the route and the more often the interest rate can change, the more you are exposed to an increase in interest rates and an increase in the monthly repayment. A 2/3 frame trajectory is a trajectory that can be very volatile. The claim that if the interest rate rises it is recycled to more regular routes is problematic because there are no free gifts. Once interest rates rise, interest rates in the other tracks will also rise.
4. What you do not understand and it is difficult for you to predict – this is what will get you stuck
I’m not very excited about the volatility of the frame trajectory, what bothers me the most are the things that are harder to predict or do not understand. The prime track increases when the Bank of Israel interest rate rises. We look back to learn from the past, and discover that it can indeed reach significant rates in 30 years. But if you take an index-linked route – your exposure to the rise in the index can be much much more dramatic. Or when you put money in a track that changes every 5 years, the anchor, for example in Bank Leumi, is: “The calendar average real rate of return on government bond yields (linked or unlinked – whichever you choose) that are traded on the Tel Aviv Stock Exchange” – Do you know how to predict How will this thing change? now? Another 20 years? So in choosing between the types of risks you take, go for the ones that at least you understand how they develop.
And if the interest rate rises? great! It is excellent! A rise in interest rates is not a horror scenario that should be feared like 800% inflation a year. A rise in interest rates will occur when the economic situation in the economy improves, when the economy recovers. The recovery will also raise the interest rates we get in the bond sector in pension savings, the economic recovery will create more business opportunities and higher wages. And yes – also a higher monthly repayment of the mortgage. So maybe you should not run automatically now take 2/3 prime in each mortgage, But in proper risk management, and in estimating repayment capacity, there is no reason to shy away from this route, and the US Fed has announced that interest rate hikes will not be until 2022, so it is difficult to see the Bank of Israel’s interest rate rampant in the coming years.
5. 30 years is too much
Most of the difference between a 25-year mortgage and a 30-year mortgage goes to interest payments. Try to avoid such long-term mortgages, and if you are taking such routes, shorten them along the way as much as possible.
And a word about recycling: the question arose as to whether it is worthwhile to access and refinance the mortgage. The answer is that the viability of a mortgage cycle is always worth checking, once every few years. Over the years there are all sorts of factors that can lead to more attractive offers for you: from recycling at a lower financing rate than the value of the property compared to the original mortgage (because part is repaid), through changes in the interest rate curve, to a regulatory change as happened here – a change in the possible mix.
If we try to estimate at all a finger for whom it is probably not worth refinancing, then for someone whose mortgage towards the end of her life, it may not be worth refinancing. Since mortgage payments are usually made according to the “Spitzer repayment schedule”, most of the interest is already paid at the beginning.
In addition, if we look at the mortgage interest rate curve in the unlinked sector in recent years, there are years when interest rates have been so low that it is likely that the offer you received was very attractive. For example, if you took out a mortgage in 2015, it is likely that the interest rates today will not be for you some big bonanza. On the other hand – if you took out a mortgage in 2013, 2014 or 2017 – there is probably a worthwhile opening for recycling.
For more questions about mortgages, loans, and refinances: Join us on the Facebook group “Calcalist – the corona and the pocket
“.