Few predicted what happened in the prime interest rate this year (2022). We started the year with the Bank of Israel interest rate at the floor and we are ending it with an interest rate that has already crossed the 3 percent mark. The latest estimates reveal that the day will not be far away and the basic interest rate in Israel will reach 3.5 percent and possibly even beyond that. Are you having a hard time repaying the mortgage that jumped by hundreds of shekels or more? In the banking system, the bank managers realized that they had to find a solution for the customers. At this point, Bank Hapoalim was quick to offer a solution and most likely the other banks will soon follow suit.
Can the Bank of Israel lower the interest rate?
Before we explain the apparent solution in the banks to the increase in the prime, the question is whether the Bank of Israel can initiate its own move. Mortgage interest rates are rising , and not only in Israel. It may not be comforting, but you should know that there is a global trend here. In other words, the ability of the Bank of Israel or the government to push the interest rate down is very limited. But what does this mean that it is not only in Israel that the increase in interest rates has a strong effect on mortgage takers? For example, in the US, it was announced in October that the twenty-year record of the interest rate had been broken. There, the average interest rate for longer mortgages more than doubled, compared to last year (2021). While the set of tools of the governor of the Bank of Israel on the subject is limited at the moment, it is expected that the interest rate will not decrease in the coming months and perhaps not during the next year either. However, the banks, as mentioned, have initiated a solution that may suit a considerable percentage of customers.
Deploy the prime, reduce the return
The increase in interest rates had a strong impact at this stage on prime mortgage routes. Bank Hapoalim’s new offer to its customers allows those who are interested to redraw the route. Please note, this is a layout of the prime route, under the same current conditions. That is, the bank keeps the margin from the prime for each customer, and does not increase the interest rate. The redistribution of the route means that the monthly repayment will return to, more or less, as it was before the increase in interest rates this year. The longer the rescheduling of the route takes place, the lower the new monthly repayment will be. It sounds good, and for many people it is an excellent solution. This is better, without a doubt, than a situation where you have trouble paying the mortgage or, God forbid, accumulate debts and arrears interest. At the same time, the bank is not a philanthropist and does not give gifts. There is a price for this benefit, and it is important to understand what it is about.
What is the price of the prime route layout
As mentioned, Poalim’s proposal does not increase the interest rate on the mortgage, because it is not a revolving loan. In the cycle, the new interest rate may increase significantly and according to the current market conditions. However, the very fact that the mortgage is spread over a longer period, it causes an increase in the total repayment in the end. For a longer period, the customer will pay the interest. And yet there is an important advantage in a prime mortgage. This is a route with monthly departure stations. This means that those whose financial situation will improve in the future, will be able to transfer money to the mortgage without penalty. In the long run, this could be a way of neutralizing at least some of the impact of the interest rate hike.
Who should, who should not
We can summarize and say that Bank Hapoalim’s step, which will surely be followed by other banks, is important and necessary. We will make it clear that customers who are interested in this should initiate a contact with the bank, this is not a move that is done automatically. Find out carefully how the layout will affect the total repayment of the mortgage and what the new end date will be.
- This step is worthwhile if the current repayment is heavy for you.
- Laying out the prime route may be better than taking regular loans, at a higher interest rate.
- If your mortgage is new, the effect of the redeployment will be relatively small compared to older mortgages.
- It is less worthwhile for those who are doing well with the repayment at the moment, since it involves an additional payment on top of the interest.
For an individual consultation, you can contact your bank or consult a private mortgage consultant.