Rate cut to help many mortgage holders

When interest rates drop, it is also possible to improve mortgage conditions by switching from a variable interest track to a fixed interest rate.

October 23, 2006 07:21
2 minute read.

Although mortgage rates are expected to fall with the Bank of Israel's likely interest rate cut this evening creating more lucrative conditions for old and new mortgage holders, a big wave of new mortgages wasn't anticipated. "Although we believe mortgage activity might be somehow enhanced if the Bank of Israel cuts interest rate on Monday because of the better terms it would create, we think the real estate market remains negatively affected by the weakness from the lower dollar exchange rate," Moshe Cohen, head of the credit division of Bank Leumi mortgages told The Jerusalem Post. "We see fewer and fewer deals in second-hand properties prices. which are sold and bought in dollar terms." There has been a growing consensus among analysts and economists that Bank of Israel Governor Stanley Fischer will lower the interest rate by 0.25 percentage points to 5.25% on Monday following last week's drop in the Consumer Price Index. "If interest rates are lowered on Monday, we will gradually see an impact on mortgage rates as borrowing costs for banks will be lower," said Ilan Artzi, vice president of Direct Investment House. "Mortgage interest rates can be expected to come down between 0.2 and 0.5 percentage points depending on the type of mortgage." For example, family who took out a mortgage when interest rates were high might discover that they might be able lower their costs by replacing their original mortgage with a new one, at a lower rate, which could result in lower payments or a shorter mortgage period with the same monthly payments as before. Artzi added, though, that dollar-linked mortgages, which are based on the LIBOR (London Interbank Offered Rate) would not be impacted by interest rate changes by the Bank of Israel. "Mortgage rates for shekel mortgages, which are linked to the prime interest rate based on the Bank of Israel rate can be expected to come down by 0.2% if the Bank of Israel lowers its rate by 0.25%," said Cohen. "The majority of mortgage holders have a combined mortgage, but we would advise those with mortgages linked solely to the dollar to switch to a mortgage linked to the prime rate." Cohen added that today it was common for people to take a combined mortgage divided up into 30% fixed rate, 30% variable rate and 40% prime rate. When interest rates drop, it is also possible to improve mortgage conditions by switching from a variable interest track to a fixed interest rate. This type of switch would be appropriate for people who took out loans with variable interest, when interest rates were high in the hope that they might drop. "Switching to a fixed interest track takes advantage of the new market reality of a lower interest, in order to set the interest rate for the long-term," said Artzi. "But bank penalty and commission fees should be checked if it is worth the change."

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