long.table

By KIRA VOLVOVSKY
May 4, 2006 11:48
1 minute read.

 
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Loan TypeProsCons
Fixed rate, Shekel-denominated, CPI-linked
  • When interest rates are low, a low rate can be locked in for the long term.
  • The outstanding balance of the loan is adjusted by the inflation rate.
  • Even if salary increase is above the inflation rate in the long term, in the short term, salaries may lag behind the inflation rate.
  • Prepayment penalties.
Floating rate, Shekel-denominated, $ or £ linked
  • Good for those whose salaries are $ or £ linked or denominated.
  • Loan can always be refinanced if NIS/$ rate deteriorates or if floating interest rates rise.
  • No prepayment penalties.
  • Interest rate shocks.
  • NIS/$ typically adjusts when inflation is rising and fixed rates are going up leaving limited refinancing options.
Floating rate, Shekel-denominated, non-linked
  • Even in hyper-inflationary environments, the balance is not adjusted.
  • No prepayment penalties.
  • Interest rate shocks.
  • When inflation is high, the Israeli Prime Rate typically rises as well.
Hybrid
  • A very low fixed rate can be locked in for the period before the reset date.
  • No prepayment penalties at the reset date.
  • Excellent for those borrowers who can time a reset date to coincide with an expected salary bonus/maturing of keren hishtalmut.
  • Interest rate shocks if no good refinancing option is available.

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