BANK OF ISRAEL
Office of the Spokesperson and Economic Information
December 30, 2014
Press Release
The Ministry of Construction and Housing, in conjunction with the Bank
of Israel Banking Supervision Department, is promoting measures to
encourage the refinancing of mortgage loans by eligible homeowners
Construction and Housing Ministry Director General Shlomo Ben-Eliyahu: “The
option of refinancing a mortgage is a further step intended to make it easier for
home purchasers and home owners. The fruitful cooperation with the Bank of
Israel will make it possible for tens of thousands of eligible homeowners to
realize significant savings in their day-to-day expenses. This is a further step in
our struggle to lower the cost of living and the cost of housing, and I am pleased
and thankful for the banks’ worthy cooperation.”
Supervisor of Banks David Zaken: “I am pleased that the banks have acceded to
our request and will make it possible for eligible homeowners to refinance the
mortgages given to them by the State, and to obtain mortgages with easier
interest payments (interest that will not exceed the average interest rate on
housing loans), through a short process with minimal fees.
The Ministry of Construction and Housing and the Bank of Israel Banking
Supervision Department are promoting a measure to encourage the early repayment,
or refinancing, of State mortgage loans to eligible homeowners. Until 2012, the
interest rate on State loans to eligible homeowners was 4 percent indexed to the CPI.
Since there has been a significant drop in the average interest rate on CPIindexed housing loans over the years, and since the early repayment of State
loans does not involve the payment of capitalization differentials, it has become
markedly more worthwhile to repay those mortgages early. It is economically
worthwhile whether the early repayment is from the borrower’s equity (compared to
risk-free alternative investments with a real yield of 4 percent), or through the
refinancing of the loan and taking out a new loan at the currently prevailing interest
rates.
Over the years, the State of Israel has made grants and directed loans available to
those purchasing their first home as part of its housing assistance policy. As of the
end of June 2014, the balance of directed loans (excluding pending loans) totaled
about NIS 18 billion. A rough estimate shows that, assuming that about half of
borrowers will respond to the measure and refinance their loans, the savings to
borrowers will be around NIS 250 million.
The objectives of the measure led by the Ministry of Construction and Housing in
conjunction with the Bank of Israel are:
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 To increase public awareness of the economic worthwhileness of early
repayment of mortgage loans to eligible homeowners, which carry a real
interest rate of 4 percent or more, whether through self-financing or through
the refinancing of the loan with a new loan (hereinafter: refinancing loan)
issued by the banking corporation.
 To make it easier for borrowers who wish and are able to refinance the loan,
so that they can do so through a quick process at market prices.
For this purpose, a special track has been created which the six major banks—Leumi,
Hapoalim, Mizrachi-Tefahot, Discount, First International and Union Bank—have
joined, and the banks have agreed to offer borrowers who meet the benchmark
conditions detailed below refinancing loans with terms detailed in this document. In
this context, it is important to emphasize that this process does not derogate from
the borrower’s right to repay the directed loan in any other way he chooses: selffinancing; refinancing through the bank that administers the loan, under various
conditions; or refinancing through another bank. Furthermore, this process
does not harm the rights of a borrower who has taken out additional loans
beyond the directed loan to refinancing the other parts of the loan taken from
the bank, and it is recommended at this time to assess the feasibility of
refinancing the entire loan. It is emphasized that regarding these other parts of
the loan, it is not necessarily worthwhile to refinance, particularly because some
refinancing transactions involve early repayment fees, which make it necessary
to assess the feasibility for each case on its own.
The following graph illustrates the drop in the real interest rates that has taken place
over the past few years, and the gap that currently exists between the average interest
rate on housing loans (the price of the refinancing loan) and the 4 percent interest rate
(the price of the benefit loan), as well as the gap between the yield to maturity on CPIindexed government bonds (the price of alternative investment).
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Details of the process
A calculator will be placed on the Ministry of Construction and Housing website,
which is intended to assist borrowers in assessing the feasibility of refinancing. At the
same time, the banks that have joined the process take upon themselves a commitment
to make refinancing loans available to borrowers who meet the conditions detailed in
this document, until May 31, 2015.
A. Benchmark conditions for refinancing a loan on the fast track
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The original directed loan provided to the borrower carries a real interest
rate of 4 percent or higher;
The loan was repaid on schedule until the date of refinancing;
The balance of the loan on the date of refinancing (excluding early
repayment fees) does not exceed 75 percent of the value of the attached
property. A borrower who wishes may provide the bank with an assessor’s
report to determine the value of the property at the time of the refinancing.
There are no extenuating circumstances that justify the withholding of
refinancing under these terms.
It is understood that this will not prevent the banking corporations from
also acceding to requests from borrowers who do not meet one or more of
these benchmark conditions.
B. Terms of the refinancing loan
In order to motivate borrowers to act of their own volition to improve the
terms of their loans at the banking corporation that provided the loan, it has
been agreed that the following will be put into practice:
- Since this is a process of changing the terms of the loan, the fee that will
be collected is the fee for changing the terms of the loan and shall not
exceed NIS 120. No other fee will be collected.
- The refinancing loan shall be for an amount that does not exceed the
balance of the directed loan for repayment and its duration shall not exceed
the remaining duration of the directed loan until repayment.
- The refinancing loan shall be issued at a fixed interest rate indexed to the
CPI.
- The interest rate on the refinancing loan shall not exceed the average
interest rate on CPI-indexed housing loans known on the date the loan is
taken out, in accordance with the period remaining to repayment, as
calculated for the purpose of the Banking (Early Repayment Fees) Order,
5762–2002. The interest is calculated in accordance with the remaining
period to repayment of the loan.
- Due diligence—The banking corporations will send borrowers who meet
the benchmark conditions detailed above a letter in which the price of
refinancing and its implications are detailed (including the fee involved in
refinancing, the fact that the refinancing loans are not subject to the
Housing Loans Law, 5752–1992 and particularly Section 5a of that law,
and that the borrower’s right to a discussion before a special committee in
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a case of arrears is therefore forfeit, and the fact that in case of additional
early repayment, an early repayment fee may apply on the amount
currently being repaid).
Following the borrower’s confirmation that he is interested in refinancing,
through any of the means of communication (letter, recorded conversation,
the bank’s website, and so forth), the banking corporation shall produce a
document amending the loan contract, without it being necessary for the
borrower to come to the banking corporation’s branch. The amendment to
the contract shall be sent to the borrower by way of the communications
method he chooses, and he shall return the signed document to the bank,
through any of those methods.
Upon completion of the process, the bank shall send the borrower
confirmation of the refinancing.
If, following the refinancing, the borrower decides to also repay the
complementary loan that he had, the reduction in the capitalization
differentials set in the Banking (Early Repayment Fees) Order, 5762–2002
shall be kept in place.
Should a borrower wish to refinance an additional loan (complementary
loan), in addition to the directed loan, through bank financing, that stated
in this document shall not apply to the complementary loan.
Assessing the feasibility of the process for the borrower
The following are a number of examples (based on actual cases) that illustrate the
economic feasibility of early repayment of directed loans bearing a real interest rate of
4 percent, in a number of ways: reducing the monthly payment, reducing the number
of payments, and calculating the financial profit in terms of current value.
In example 2 in the table below: As of August 2014, the monthly repayment for a
customer who took out a loan for NIS 90,000 in July 2005 at an annual interest rate of
4 percent indexed to the CPI for 25 years is NIS 586. Following refinancing of the
loan, the monthly payment for that same borrower will be just NIS 533, meaning a
savings of NIS 53 in the monthly payment, which translates to a cumulative saving of
NIS 8,224, which is about 10 percent of the balance of the directed loan.
For later loan issue dates, the cumulative savings for a borrower are expected to be
even higher, since the period remaining to final repayment is longer, during which the
borrower will benefit from a lower interest rate.
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The following are a number of additional examples that illustrate the economic
feasibility of refinancing as part of this process1:
Current figures:
Date the loan was issued
Original loan amount
Original annual interest
Original loan period
Remaining period until loan repayment
Current value of outstanding loan (including
indexation) as of August 31, 2014
Current monthly payment
After refinancing of the loan:
New annual interest, according to the average
interest rate on CPI-indexed housing loans, by
remaining period until loan repayment. 2
New monthly payment
Savings:
Savings on monthly payment
Cumulative savings = savings in monthly
payment * the number of payments remaining to
full repayment
Current value of cumulative savings
Alternatively: Shortening the loan period by
months, should the monthly payment remain
unchanged.3
Example 1
Example 2
Example 3
June 30, 2000
NIS 90,000
4%
25 years
10.8 years
NIS 66,421
June 30, 2005
NIS 90,000
4%
25 years
15.8 years
NIS 82,429
June 30, 2010
NIS 90,000
4%
25 years
20.8 years
NIS 87,113
NIS 631
NIS 586
NIS 514
2.22%
2.69%
2.92%
NIS 576
NIS 533
NIS 466
NIS 55
NIS 7,172
NIS 53
NIS 10,106
NIS 49
NIS 12,140
NIS 6,371
16 monthly
payments
NIS 8,224
27 monthly
payments
NIS 9,086
37 monthly
payments
The Banking Supervision Department is available to the public for any questions
concerning the process to encourage the refinancing of mortgage loans for eligible
homeowners. To obtain information in this matter, please contact the Public Enquiries
Unit at michzur@boi.org.il.
1
The estimate of economic feasibility relates to the savings derived only from refinancing the loan, and
does not take into account additional costs, should there be any (such as the fee for changing the terms
of the loan, or collection fees).
2
Annual nominal interest rate based on the average effective interest rate on CPI-indexed housing
loans (yearly basis) published monthly by the Bank of Israel, which serves in the calculation of the
early repayment fee. The interest rate is taken in accordance with the remaining loan period until final
repayment.
3
The calculation is based on the interest rate adjusted to the shortened repayment period.
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