Last Monday the Bank of Israel announced its sixth consecutive rate hike of the year. The interest rate has increased by 0.5%, to 3.25%, the highest level in over a decade. As a result, the prime rate has increased from 4.25% to 4.75%. Beginning from Thursday, a new interest rate is now in effect. The cost of new loans that are pegged to the prime rate have also moved higher. The same goes for fixed interest rate offered by lenders.
The Association of Mortgage Consultants determined that for a typical mortgage of NIS 1,000,000 (of which 45% is in the prime rate for a duration of 25 years), the increase in interest would result in an additional rise in monthly repayment of NIS 128. On the face value, it looks insignificant, but when comparing it with the beginning of the year, it has jumped by 41% or NIS 745 – from 1821 shekels to 2566 shekels!
Overdraft fees and the interest on many other types of consumer loans are tied to the prime rate. In other words, the interest rate a client pays is equal to the prime rate plus a margin set by the lending institution. The rate of rise for such loans will mirror any future increases in the prime lending rate set by the Bank of Israel.
Therefore, when the interest rate goes up, it will have a bigger effect on the monthly payment of a consumer loan than it would on a mortgage payment. This is because the term of a consumer loan is shorter than that of a mortgage, which is usually paid back over a couple of decades.
At this point, experts are not worried about mortgage defaults or a drop in home prices, despite rising mortgage payments straining the budgets of many households and a reduction in mortgage applications. Not now, or at least not in any significant way. This is due to the fact that both the loan-to-value ratio (the amount of the loan relative to the value of the property) and the repayment-to-income ratio (the percentage of monthly income that goes toward paying the mortgage) are capped at 40% in the banking system. In isolation, this number looks high, but it serves as a formidable safeguard for borrowers and the broader economy.
Association of Mortgage Advisors experts, on the other hand, are more concerned because some families are already struggling to make ends meet owing to rising mortgage expenses and are quickly reaching the 40% monthly mortgage expense/income mark. They have been receiving an increased number of phone calls from clients who have hit rock bottom and are treating the issue as an emergency.
The association also highlights the plight of the tens of thousands of Israelis whose monthly payback has increased dramatically since they purchased the property from a contractor. This is because, during the first term (the grace period), they simply make interest payments (without principal payments).
During the grace period, the amount of the monthly payment has increased by NIS 188. (compared to an increase of NIS 128 in a regular mortgage). The monthly instalment for these families increased by NIS 1,181 since the beginning of the year, compared to a regular mortgage increase of NIS 745.
Although it is still early to draw any conclusion, and the macroeconomic situation could go either way, time will tell how the new interest rate reality is affecting homeowners and the broader Israeli housing market.