Bank of Israel figures show that the average interest rate on index-linked mortgages rose from 3.84% in January to 3.85% in February, completing a rise of almost 2% in 18 months.
Causes of the increase included expectations of a rise in the Consumer Price Index (CPI); a slackening of competition between the banks; bond market fluctuations, which affect the mortgage market; expectations that the Bank of Israel will raise its interest rate; and, above all, continued demand for housing, despite reports of a slowdown.
The interest rate on 20-25-year mortgages climbed from 4.13% in January to 4.19% in February, while the rate on 15-20-year mortgages was up from 4.11% in January to 4.14% in February.
The upward trend extended to all mortgage periods. The figure published means that the effective mortgage interest rate (taking index-linkage into account) is nearing 6%: the Bank of Israel itself sets the annual inflation target at 1-3%. While it is true that this target has not been achieved in recent years (the CPI has gone down in the recent years), the expectation is that inflation will resume in the near future. In such a scenario, people who take index-linked mortgages will discover that their mortgage payments are significantly increasing. If we assume that the CPI will increase by 2%, the effective interest rate will be around 6%, which is high.
At the same time, the average interest rate on unlinked mortgages fell slightly. The rate dipped from 3.37% in January to 3.33% in February, after having risen 1.2% over the preceding 12 months. Here, too, the determining factors were expectation of a hike in the Bank of Israel interest rate and growing demand for housing.
The drop in the average unlinked mortgage interest rate in February is irrelevant to most mortgage borrowers, for the simple reason that the rate went up for the most popular mortgages. The interest rate on 20-25-year unlinked mortgages rose from 4.91% in January to 5.01% in February, and the interest rate on 15-20-year unlinked mortgages rose from 4.66% in January to 4.71% in February.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 19, 2017
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