For the first time in four months the Bank of Israel this week raised interest rates for August by a quarter percentage point from 1.5 percent to 1.75 percent in a move to cool Israel real estate prices which are feared to develop into a bubble. Over the past year prices in the Israel housing market have risen over 20 percent and the Bank of Israel warned recently that if they continue to rise at this pace a bubble will develop.

In its statement, the Bank of Israel, said that prices continued to climb rapidly in April and “if prices continue to rise at the current pace, they are likely to deviate from the level consistent with the basic economic conditions.”

Apart from a measure to slow down housing prices, the interest rate hike has a direct impact on homebuyers who in recent years have increaslingly taken out prime rate loan mortgages in Israel linked to the Bank of Israel rate. The prime rate is fixed 1.5 basis points above the Bank of Israel rate. Monthly repayments will vary any time the Bank of Israel adjusts its monthly bench mark interest rate. In effect, the latest interest rate hike means that monthly payments on prime rate loans are on the rise and have been steadily increasing since the Bank of Israel started to raise interest rates in August 2009.

For example, homebuyers who took out a prime rate loan of NIS 550,000 for 15 years have a monthly payment of NIS 3642. As a result of the August interest rate increase monthly payments will go up by NIS 66. If compared to a single month the increase may seem rather small. However, the Bank of Israel started to raise interest rates in August last year and over that year to August this year monthly payments have been steadily increasing to a total of NIS 330 in the example mentioned.

At the same time though, it needs to be remembered that mortgage rates increased after the base lending rate dropped to a record low of 0.5% last year and therefore the renewed rise in rates still leaves the market in a relatively low territory.

AMG, a mortgage consultancy firm, explains that prime rate loans are still attractive since the main alternative mortgage track, which is linked to CPI or Madad is more expensive at current conditions. Hence a combination of tracks is recommended.

However, in every mortgage there is a risk and therefore experts at AMG recommend borrowers to determine the approriate level of risk they can take before making a decision over one or another mortgage track or a combination of tracks. For example, under the current conditions in the Israel real estate and mortgage market, it is not recommended to significantly reduce the weight of a fixed prime rate loan in the mortgage portofolio but divide it on two tracks between a fixed prime rate loan (50% to 60%) and the remainder on a CPI-linked track (30% to 40%).

Source: Buy it in Israel

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