The recent interest rate rise marks the end of a period in which money was cheap and mortgage takers benefited from many years in which rates interest rates were low and their monthly repayments remained almost unchanged. However, the changing trend that began earlier this year with a gradual increase in the consumer price index (CPI) has now accumulated to inflation of some 4% over the last 12 months.
Follow Israel Hayom on Facebook, Twitter, and Instagram
The independent mortgage advisory group Darcenu explains that the increase in the CPI has a more dramatic increase dramatic effect on mortgage takers than the increase in lending rates and that even if the prime rate goes up to 1.5% its influence will be marginal compared to a continued increase in the CPI as not only monthly repayments are linked to the CPI but the principal of the loan as well.
For example, the company gives a scenario NIS 1 million shekel mortgage with two different tracks: One-third of the money is borrowed at the prime rate and two-thirds is borrowed with a fixed-rate, index-linked loan. In the event that the prime rate increases to 1.5%, the monthly repayment on that part of the loan will increase by NIS 25, with the yearly increment totaling NIS 300, while the outstanding balance of the mortgage at the end of the year would be NIS 976, 985.
On the other hand, the significance of a 4% increase in the CPI (on two-thirds of the loan) is that monthly repayments will rise by NIS 142 on an overall yearly repayment of NIS 26,316. The outstanding balance of the loan at the end of the year, however, would stand at NIS 1,002,495 – a higher sum than the sum originally borrowed!
According to Darcenu CEO Maor Ohana, people taking out new mortgages and even those who took out mortgages in recent years need to be alert to the changes in interest rates and in the CPI, and in considering what loan to take out, they should take into account not only the monthly repayment but also the overall cost of the loan and the expected increase in the principal of the loan as a result of an increase in the CPI. Those with existing mortgages, he says, should conduct a comprehensive check of their mortgage in order to reduce exposure to index-linked components to a minimum in accordance with their monthly repayment capability.
Subscribe to Israel Hayom's daily newsletter and never miss our top stories!
With regard to new mortgages, Ohana recommends a low percentage of exposure to indexes. However, the most significant advice he has for those taking new mortgages is to take into account that monthly repayments will increase in any event, and therefore, when choosing an apartment and taking a mortgage, they should leave a safety net of a few hundred shekels a month in relation to earnings in order not to reach a situation where they encounter difficulties in making their mortgage repayments.
This article might include sponsored and commercial content/marketing information. Israel Hayom is not responsible for its nature or its credibility. The publication of such content or information shall not be considered a recommendation and/or an offer by Israel Hayom to purchase and/or use the services or products mentioned in this article.
