Banks make sympathetic noises, but raise mortgage rates

Mortgage

Mortgage advisers report that interest rates on mortgages have risen by up to 0.5% in the past few days.

At a time when the mortgage banks are making sympathetic announcements and stressing the benefits that they are granting their customers, they have actually been raising the interest rates that they charge. Mortgage advisers explained to "Globes" that these interest rate hikes reached as much as 0.5%. Some of the advisers expressed concern that this was only the beginning, and that the banks would continue raising interest rates out of concern about economic paralysis, even if the Bank of Israel cut the general interest rate.

Starting late last week, the government announced a series of emergency measures, including the closing down of educational institutions and businesses. An examination of a simulation for mortgages conducted by Yamit Afriat from the Association of Mortgage Advisers revealed that the mortgage banks had begun to raise their interest rates.

Simulations conducted now, compared with simulations from three weeks ago, show the interest rate hikes. Monthly payments on a 30-year NIS 800,000 mortgage rose by NIS 90-100, because the mortgage rate went up by 0.2%, and the total amount payable increased by NIS 28,000. The interest rate on a 20-year NIS 1.25 million mortgage went up by 0.4%, and the current terms require borrowers to increase their monthly payments by NIS 240 to NIS 7,000. The total amount paid for the mortgage is NIS 65,000 more.

"The interest rate hikes reflect the risk premium and the rise in bond yields, which make the mortgages linked to them more expensive," Afriat explains, emphasizing, "This is unrelated to the interest rate in the economy. On the contrary; it is still likely to fall, but that does not mean that the mortgage interest rate will fall, because there is no direct connection between the two interest rates."

Vider Mortgages CEO Meir Vider adds, "The mortgage banks recently announced an increase in the mortgage interest rate because of panic about the effect of the coronavirus on the economy and the housing market. The interest rates on all mortgage tracks are expected to rise by 0.2-0.6%, with a steeper increase for unlinked loans. Barring a significant change in the governor of the Bank of Israel's decision, we can expect the spread above the prime interest rate, currently 1.75%, to remain at 0.5-0.7%.

Vider nevertheless believes that interest rates are still very low, and that it is worthwhile taking a mortgage now on inexpensive terms. Like Afriat and other mortgage consultants who spoke with "Globes," Vider believes that the mortgage banks will raise their interest rates still further in the near future.

In general, the mortgage advisers are unimpressed by what is being called "benefits" in the banks' advertisements in recent days. Afriat warns that what the banks are calling "benefits in the light of the emergency" should be scrutinized closely, particularly the offer by some of them to permit a postponement of mortgage payments, a measure that has proved to be the result of a call to the banks by the Bank of Israel.

"No free gifts - The banks will not lose money"

"There are no free gifts, and the banks are losing nothing by postponing mortgage payments," Afriat says, adding, "The customer asks to stop making mortgage payments for three months, and at the end of that period, he or she goes back to the mortgage and pays compound interest, including linkage. The bank is not granting any benefits; even in ordinary times, a customer who loses his or her livelihood can ask the bank for a suspension of payments. The problem is that they are advertising it now as a benefit, as if they were making concessions to customers because of the emergency. I see people seduced into believing that it's a benefit, without understanding the consequences. Instead of a NIS 5,000 monthly mortgage payment, they will pay NIS 5,020 a month three months from now. If you don't really need it, don't use this arrangement."

Higher all-purpose loans

At the same time, there are also changes in general loans. In an effort to relieve the cash squeeze, the Bank of Israel is allowing large loans to be taken for any purpose against a mortgage on homes. Up until now, the maximum lien was 50% of the property value. The Bank of Israel is permitting loans for any purpose which, when combined with the mortgage, can reach 70% of the value of the property.

"The logic of the Bank of Israel's measure is that if people get into debt now and can't manage financially in this situation, they will have an option to take a loan for any purpose on the basis of a property. This doesn't so much apply to employees, unless they are put on unpaid leave. In my opinion, self-employed people are the ones who will need this. Taking NIS 200,000-250,000 more now, with repayment spread over 20 years, can really help them save their situation," Afriat says.

Published by Globes, Israel business news - en.globes.co.il - on March 17, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

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