Mortgage Refinancing Savings Delayed by Fees, Calculator Shows

Refinancing a mortgage in Israel can lead to significant long-term savings, but upfront fees can delay the point at which borrowers actually start saving money, according to a new analysis.

For example, a borrower with a NIS 900,000 loan at 5.5% interest and 20 years remaining could see their monthly payment drop from NIS 6,191 to NIS 5,549 by switching to a 4.2% interest rate. However, an early repayment fee of NIS 41,640, along with NIS 4,000 in other administrative costs, means the borrower won't begin to see a net monthly saving for 72 months (six years).

Over the remaining term of the loan, the net saving in this scenario amounts to NIS 108,404 after all fees are deducted. A new online simulator developed by financial institutions aims to present both the monthly savings and the one-time costs simultaneously, offering a clearer picture to borrowers.

The early repayment fee, known as a 'discount fee' or 'capitalization fee,' is calculated based on the difference between the old loan's interest rate and the average market interest rate published by the Bank of Israel. The higher the old interest rate compared to the market rate, the larger the fee, effectively offsetting some of the refinancing's apparent benefit.

Loans with a significant portion in the Prime Rate track (which is largely exempt from this fee) incur much lower costs than those entirely on a fixed-rate track. The simulator allows users to input the proportion of their loan on a fixed-rate track to accurately calculate the fee. Other factors influencing the calculation include the remaining loan term, with shorter terms generally resulting in lower fees due to fewer future payments to discount.

Borrowers can also negotiate discounts on the early repayment fee, which the simulator can factor in. Extending the loan term can lower monthly payments but increases the total interest paid over the life of the loan. The simulator focuses solely on the interest rate's impact, assuming the loan term remains constant. The market interest rate used for fee calculation is updated monthly, making it advisable to re-run calculations before finalizing a refinance, especially if the initial calculation was done some time ago.