Refinancing Mortgages in Israel: Navigating Fees to Maximize Savings
As the Bank of Israel lowers its benchmark interest rate, many Israelis with existing mortgages are considering refinancing to secure lower rates. However, a recent analysis by Bizportal highlights that simply looking at a reduced monthly payment can be misleading, as significant early repayment fees on old loans can drastically diminish potential savings. The key to successful refinancing lies not just in the new, lower interest rate, but in understanding the structure of the existing mortgage and the associated costs of exiting it.
For a mortgage with a remaining balance of 900,000 shekels, refinancing from 5.5% to 4.2% could reduce monthly payments by about 656 shekels, totaling over 7,800 shekels annually. Yet, if the original loan had a fully fixed rate, the early repayment penalty could approach 97,927 shekels. After accounting for new loan origination costs, the net savings over the remaining term might only be around 71,000 shekels, not the hundreds of thousands initially imagined.
The impact of these fees varies significantly. In another scenario with the same loan balance and new rate, but a mixed structure for the old loan (partially fixed, partially variable), the early repayment fee dropped to approximately 45,128 shekels. This resulted in a net saving of about 104,916 shekels and a payback period of 77 months, demonstrating how the original loan's composition is crucial.
Early repayment fees are designed to compensate banks for lost future interest income. They are typically higher when market rates have fallen significantly below the borrower's existing rate and the loan term is long. Borrowers are advised to obtain precise early repayment cost calculations from their current bank before proceeding, as these fees, along with other costs like property appraisals and registration, must be factored into the total savings calculation. Sometimes, refinancing only a portion of the mortgage with a particularly unfavorable rate might be more beneficial than refinancing the entire loan.
