Early Mortgage Repayment Costs Vary Wildly Based on Loan Type
The cost of early mortgage repayment in Israel can differ dramatically depending on the loan's interest rate structure, with a NIS 400,000 balance potentially costing NIS 28,798 for a fixed-rate loan versus just NIS 60 for a prime-rate loan. This significant difference stems primarily from the "discount fee" (commission of capitalization), which applies to fixed-rate loans but is largely absent for prime-rate loans. This fee, along with other regulatory charges, can amount to up to 7.20% of the outstanding balance.
The discount fee is calculated by the bank based on the present value of remaining payments, discounted by the current market interest rate. For example, a loan with a 5.5% interest rate compared to a market rate of 4.2% over 15 years creates a difference that the bank charges as compensation for lost interest. The closer the loan is to its maturity date, the lower this fee becomes, as fewer payments remain to be capitalized.
Several factors influence the calculation: the outstanding balance, the loan's interest rate, the remaining term, the loan type, and the current market interest rate. The remaining term is a particularly influential factor; a shorter term significantly reduces the fee. The system also allows for adjustments based on a default discount of 20%, reflecting potential bank concessions based on the remaining loan term, enabling borrowers to estimate the impact of such concessions.
Borrowers can also reduce early repayment fees by providing 30 days' advance notice to the bank, which exempts them from one of the fees. This simple step is often overlooked until after funds have been transferred. The article highlights that prime-rate loans, whose interest rates fluctuate with the market, incur only a minimal operational fee of NIS 60 because the discount fee is effectively eliminated.
Early repayment fees typically arise in situations such as selling a property, receiving an inheritance, a retirement grant, or refinancing. The article suggests using a calculator tool before finalizing transactions like a property sale to understand the precise cost of early repayment, which can range from negligible to substantial.
