Refinancing Your Mortgage
Is refinancing your mortgage a good idea now? The new Bank of Israel mortgage regulation allows borrowers to take up to 2/3 of their mortgage linked to Prime, which is currently at a historic low rate of 1.6%. Until recently the regulation stated that no more than 1/3 of a mortgage could be linked to Prime. (Of course, some of you may remember that prior to that regulation there were no regulations at all and people were able to have their entire mortgage linked to Prime…but this is just a quick article meant to be practical – not a boring dissertation on the history of Israeli mortgages.)
In addition to being able to get 2/3 of a mortgage linked to Prime, long term fixed rates for the remaining 1/3 are now also at or near historic lows – in the neighborhood of 3.0%-3.75%.
As a result, many clients have been calling to ask if it is worth refinancing now, or if it is an especially good time to purchase a property.
Every person’s situation is unique and there are so many potential variables to consider, so it is obviously impossible to answer this question for anyone in particular without knowing the entire situation. But here are a few ideas to consider if you have been wondering about this recently or if the subject happens to come up for you over the next few months.
The Prime rate, while very low now, is a variable rate – and 30 years is a long time. Even though your initial mortgage payment may be a few hundred shekels lower now with more linked to Prime, are you sure that it would not be worthwhile to lock in more of your mortgage with a long term fixed rate at the low levels that are available now?
Some people are not aware of the fact that Israeli mortgages have a unique feature which allows you to keep your mortgage even after selling your house. If you sell your existing apartment in 5 years, for example, then you can keep the terms of your existing mortgage by “dragging” (in banking Hebrew it is called גרירה) your current mortgage to your new property. So locking in the low fixed rate now can help you even for the next house (and the next house after that) that you may purchase in the future.
One of the main reasons that Bank of Israel changed the policy to allow people to take more of their mortgage linked to Prime is that they are convinced that variable rates will remain low for the long term. Now, Bank Of Israel has clearly been one of the most successful central banks in the world over the past two decades. However, history has often shown that whenever all of the experts tell you not to worry about something, you should probably start to worry. As a person who lived in South Florida during the subprime mortgage crisis and housing bubble of the 2006, I personally saw many, many houses go into foreclosure with the “safe” variable rate mortgages that were so common at that time. (If you don’t know what I’m talking about and have some extra time while you are in lockdown, you can watch “The Big Short” on Netflix.)
Fixed rate loans have been preferred for years because of the safety and security that they offer. We probably should not be so quick to abandon them just because things seem safe now. It’s also good to remember that we live in the Middle East – things tend to change especially quickly around here.
So who would benefit from this new regulation?
An investor who has access to enough cash to pay off the variable mortgage if rates quickly rise is someone who could benefit from this. The investor could enjoy the low rates as long as they last and then pay off the mortgage if the rate becomes no longer worthwhile. Similarly, people who do not need a long term mortgage could benefit from this. They could pay the low rate for now and even if it goes up at some point over the next few years, they would not be stuck long term with a high rate mortgage.
But most people who need a long term mortgage (and do not have the flexibility to pay it off quickly if the rate suddenly goes higher) should think very carefully before structuring their mortgage with a high percentage of the loan variable linked to Prime.
Overall, it is a very good time to take a new mortgage because fixed rates and variable rates are both at, or very near their historic lows in Israel. If you have any particular questions about your specific situation, I’d be very happy to help. You can reach me at firstname.lastname@example.org or (052) 371-1871.
Adam Siegel is a mortgage consultant working with the mortgage consulting firm of Mortgage Israel.