The Prime-Rate Track
A prime-linked loan is a mortgage track anchored to the Bank of Israel interest rate plus 1.5%. The rate changes every month according to the decisions of the Bank of Israel Monetary Committee.
Regulatory limits
The prime-rate track (together with the other variable-rate tracks — Malatz and Matz) may not exceed 67% of the total mortgage mixture. This limit was put in place as a safeguard, given how volatile this track is.
What affects the rate?
The Bank of Israel sets the base rate in order to:
- Maintain price stability — keeping inflation low and steady.
- Preserve the value of the currency — preventing excessive appreciation or depreciation of the NIS.
A rapid rise in the rate can push the NIS up, which hurts the competitiveness of Israeli exports.
For up-to-date interest-rate figures, see the interest-rate statistics.
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Advantages
- Exempt from the prepayment penalty — because the rate isn't known in advance, the loan can be repaid at any time with no fee. That's a real advantage for anyone planning to sell the property or refinance down the road.
- Flexibility during periods of low rates — when the Bank of Israel rate is low, the monthly payments are significantly lower.
Disadvantages
- Instability and high risk — the rate changes very frequently, which creates uncertainty in the monthly payments. During periods of rate hikes, the payment can rise sharply in a short time.
- Low profit margins for the bank — this track is less profitable for banks, which can lead them to demand higher rates on other tracks.
Common mistakes
- Judging the mortgage mixture by the prime rate alone — a one-dimensional comparison of this one track, instead of an overall assessment of the entire mixture. You need to look at the full picture.
- Stretching it over a long term — to shrink their fixed-rate loans, people take prime for the maximum term (up to 30 years). But that increases exposure to large rate swings over a long stretch.
The prime-rate track is an excellent tool in certain situations — for example, when you plan to sell the property in the short term or to refinance the mortgage. But it requires the ability to absorb swings in the monthly payment.