Interest Rates on Israeli Mortgages

When considering the interest rate options on a mortgage in Israel, the deliberation will be different to the one you are used to. For whilst in many countries, “Floating or Fixed?” is to mortgages what “Chicken or Beef?” is to airline cuisine, in Israel the proverbial menu has a far wider selection!

On the one hand, a larger choice of interest rate ‘tracks’ allows for increased ability and flexibility to match the mortgage to your specific requirements. On the other hand, the wider selection leads to increased perplexity and much head-scratching. Add to this the cultural and language differences that non-native Israelis have to overcome and the confusion and potential mismatching increase greatly.

As Israeli mortgage advisers, we help our clients navigate the various options that are available, and tailor the mix of mortgage tracks as best as possible to their situation.

In this article we outline the most common tracks that are used by borrowers in Israel. As many of you will have taken out a mortgage in the past, we have not included the generic explanations of each track (e.g. "On a fixed interest track, if market interest rates rise the loan rate is unaffected"). The advantages and disadvantages listed at the end of each track, however, may be both generic and Israel-specific. To make this article even more useful ,the italicized words at the end of the track name are what they are called in Hebrew.

1. Floating Rate – ‘Prime’

The interest rate on the loan is simply linked to the ‘Prime rate’ (which is 'the Bank of Israel rate + 1.5%'). The borrowing rate will be quoted as ‘Prime +/– X%’. If the Central Bank raises rates the mortgage interest rate will increase by the total amount of the rate rise, vice versa. For this reason, the portion of the overall loan that can have a floating rate is capped by the regulator (as of time of writing) to around one third of the total loan amount. This is in order that changes in the interest rate by the Central Bank will not cause too sharp of a fluctuation in borrowers’ monthly repayments (as only a maximum of one third of the monthly repayment is affected immediately by the change in rates).

Advantages:

- No early repayment penalty – Easy to re-finance

- Not linked to inflation

- Loan amount does not grow over time (see next week’s piece)

- Currently attracts the lowest rate of interest of all tracks

Disadvantages:

- Potential for relatively high fluctuations in monthly repayments (see above)

- Interest rates can change many times over the loan's life, making budgeting difficult.

2. Non - Linked Semi – Fixed – ‘Ribit Mishtaneh Lo Tzamud'

The rate is fixed for a period of 5 or 10 years, and is then re-fixed at the end of these periods. The rates are linked to a base interest rate that is generally derived from the local government bond market. This is known as the ‘ogen’ (literally ‘anchor’). The interest rate on this portion of the loan will be’ ogen + X%’, and it is the ogen that is re-fixed every 5 or 10 years.

Advantages:

- Not linked to inflation

- No early repayment penalty if the loan is paid off on the re-fixing date

- If paid off early and between re-fixing dates, the early repayment penalty (if applicable) will only be for the period of time left until the re-fixing date and not until the end of the loan period, meaning a potentially lower penalty (than for a long term fixed rate loan - see below).

Disadvantages:

- Potential for early repayment penalty

- The re-fixing rate will be subject to market conditions at the time of the re-fixing, meaning the level of future payments are uncertain

3. Linked Semi – Fixed – ‘Ribit Mishtaneh Tzamud’

This is the same as the above track, however it has one critical difference. Here, the capital amount of the loan, as well the monthly interest payments, are linked to the Israeli cost-of-living index (the CPI), i.e. inflation. Now, before getting too excited about the prospect of the loan amount being lowered during periods of deflation, unfortunately, as those famous lyrics go, 'the only way is up', and whilst the amount owed increases when there is inflation, it does not decrease when there is deflation (in this case of deflation it simply does not increase).

Whilst Israeli banks have traditionally pushed this track strongly, we would advise against using this, and indeed all inflation-linked tracks, as long as one can afford the alternatives, The reason that customers do still opt for this track rather than it's non-inflation linked equivalent, is simply because the interest rate on the linked version is lower.

Advantages:

- See the advantages of track 2 above

- Lower interest rate than track 2

Disadvantages:

- See the disadvantages of track 2 above

- Capital and monthly repayment amounts increase in line with inflation

4. Fixed Non-Linked – ‘Ribit Kavuah Lo Tzamud'

Put simply, this is a traditional fixed-rate mortgage. Depending on the borrowers age, this part of the loan can be taken for up to 30 years. Obviously, the longer you take the loan for the higher the interest rate will be.

Eventhough the rates on these loans bottomed out during 2014/5, and have been creeping up steadily ever since, they are currently (as of September 2017) still considered to be very low from a historical point of view.

Advantages:

- Not linked to inflation

- The only mortgage track where the exact repayment schedule is known from the outset

- Not affected by external factors such increasing interest rates or inflation

Disadvantages:

- Potential for early repayment penalty

- Usually the highest interest rate of all the mortgage tracks

5. Fixed - Linked – ‘Ribit Kavuah Tzamud’

In this track too, the interest rate is fixed for the life of the loan, however the amount of the loan and the monthly interest payments are linked to inflation (the Israeli CPI). Again, the linkage works only in one direction - up.

This means that whilst changes to interest rates by the Central Bank will not affect the interest rate that you are paying on the loan (e.g. 3% will stay 3% over the life of the loan), the actual interest payments will increase with the inflation, as you will be paying that 3% on an increasing inflation-adjusted amount of capital.

Advantages:

- Fixed interest rate over the life of the loan

- Lower interest rate than track 4

Disadvantages:

- Potential for early repayment penalty

- Capital and monthly repayment amounts increase in line with inflation

6. Foreign Currency Linked – ‘Tzamud Matach’

The loan is granted and repaid in Shekel, however the loan repayments are linked to the movements in the exchange rate between the Shekel and either the USD or the Euro.

The interest rate is based on LIBOR, and will be quoted as ‘LIBOR + X%’. The LIBOR rate is updated continuously during the life of the loan.

It is important to note that the mortgage repayments are linked to the exchange rate on the day of payment, so that if, for example, the mortgage was drawn down when the Shekel – USD rate was 3.85 (the ‘reference rate’), the monthly repayment will be adjusted based on the prevailing exchange rate in relation to your reference rate. Therefore, if the USD strengthens, say, to 3.95, the monthly repayments will increase, vice versa.

Furthermore, when paying off the loan early, the outstanding balance will calculated according to the exchange rate at the time of the early repayment in relation to the reference rate. The balance to be paid off can be both higher or lower than the original balance of the loan. Hence this is the only mortgage track whereby the capital owed can actually decrease.

Due to the capital risk involved, we do not normally advise our clients to utilize this track unless there is a good reason to do so (see the third advantage below).

Advantages:

- No early repayment penalty

- Can benefit from a reduction in the capital and interest payments

- This track can be useful for borrowers that have income in US Dollars or Euros, and/or are using these currencies to make their mortgage payments.

Disadvantages:

- Can only be linked to US Dollars or Euro – not any other currencies

- Both capital and interest payments can increase

- Constantly changing monthly repayments, making budgeting difficult.

A small number of banks actually offer mortgage loans in foreign currency (as opposed to the above foreign currency linked), however we will not go in to this here as most banks do not offer this anymore.

The 6 tracks described above are the most common, and most borrowers will have a mortgage loan that is made up of a combination of these tracks based on their outlook, needs and requirements (although it is important to note, that approval is subject to both the borrowers' circumstances and to Central Bank regulations, and therefore not all of the tracks are available to every borrower).

What is also important to remember is that mortgage bankers in Israel are so familiar with the various options that the customers’ understanding is often taken for granted, when it most certainly shouldn't be! Therefore, it is essential to have at least a basic grasp of the features and characteristics of the loan that is being offered, and to recognize that a mortgage in Israel is not necessarily the same mortgage you are familiar with from overseas. Only then can you decide with any level of confidence as to the suitable structure of you r loan, and actually take advantage of the flexibility that Israeli mortgages have to offer.

Looking for a mortgage in Israel? Contact us here for advice and help in getting the lowest mortgage rates.