Not just the prime rate: what really affects the monthly mortgage payment

The Bank of Israel continues to raise interest rates, which immediately leads to an increase in mortgage repayments. Many already know that an increase in the Bank of Israel interest rate affects an increase in the prime rate, but that is not all. There are other factors that affect the monthly mortgage payment, whether up or down (in the future). In other words, not only the prime mortgage route is expected to rise during a period of rising interest rates.

The prime interest rate rises, the mortgage repayments rise by hundreds of shekels per month

We will first delve deeper into what is happening with the Bank of Israel interest rate and with the prime rate at this stage. In the middle of November 2022, the Bank of Israel dropped another bombshell. According to the Governor’s decision, the Bank of Israel’s interest rate increased once more, at a significant rate. This time it was an increase of half a percent (0.5%), but this is already the sixth increase announced throughout the year. Prime mortgage holders have already felt the impact of the previous interest rate increases. This time, the average monthly mortgage payment is expected to increase by about NIS 100 per month. Doesn’t sound very dramatic, but you have to remember that this is not the only increase. From the beginning of 2022, the average monthly increase in mortgage payments is already approaching NIS 800, which is already very significant for mortgage holders in Israel.

What is special about a prime mortgage is that the increases in the monthly payment (today) or the decreases in the monthly payment (when the prime interest rate will decrease in the future) are felt immediately. Usually already in the next month after the Bank of Israel announces the new interest rate, the monthly repayment of a prime mortgage rises accordingly. But note that the vast majority of mortgages in Israel do not include only a prime mortgage. Usually it is about a third of a mortgage and the mix includes additional routes such as a mortgage with a fixed fixed interest rate as well as a mortgage with a variable interest rate – according to the change stations that were decided on at the time of taking out the mortgage.

Attached mortgage and the creeping increase in payments

A mortgage path that is considered quite solid is a mortgage with a fixed fixed interest rate. The fixed interest rate protects borrowers from interest rate changes. Regardless of whether the prime increases or decreases, the interest rate is known, fixed and, in short, guaranteed, from the beginning of the mortgage to the end. But the attachment component cannot be ignored. The consumer price index, which expresses the price increases in the economy, has also started to rise more recently. No, it is not yet serious inflation, certainly not rampant inflation as we knew it in the 1980s. This is actually lower inflation than currently exists in the United States and many other countries. Despite this, the price increase in the economy “rolls on” and also reaches the mortgages. This is a creeping and not very noticeable increase, because as mentioned, currently the rate of inflation is low compared to the rate of interest rate increase.

And by the way, there is a positive point here for anyone who feels the increase in the prime interest rate in the monthly payment. The increase in the index also affects the balance of the contract, since the fund also increases when the index increases. But this only happens in an index-linked route and not in a prime mortgage (where there is no indexation to the price index).

What will change – what is expected to happen in the changing interest rates

Along with prime mortgages and fixed interest mortgages, there are other routes. One of the most popular of these is variable interest. The date of interest rate change is determined by the borrowers decision, at the time of signing the mortgage. The change can be every year, every two, three or five years, etc., all according to the routes offered by the bank. Each variable mortgage has a mechanism known in advance, which is affected by the increase in interest rates in the economy. This is often directly affected by the average interest rate of the Bank of Israel (for mortgages) or the yields of government bonds (according to the MHAM – average life span).

The process of interest rate increases in Israel therefore affects this route as well, but it does not happen immediately as in the case of a prime mortgage. This only happens after the exit stop date arrives, which is also the interest rate change date of the mortgage you chose. In light of this, all owners of variable mortgages are expected to see a further increase in monthly payments, not just on a prime basis. This will happen after the interest rate change date arrives, whether it is next year, whether it is the following year or whether it is another month (for those who happen to have a change date in their mortgage in December 2022).

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