Embrace the Mortgage Penalty

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1/1/66

Happy New Year! Today is the first day of the 66th year of our Redemption. Celebrate!

Many Israeli mortgage types have what is commonly called a mortgage penalty associated with them if repaid early. In actuality there is no real penalty,  but a regulated capitalization fee associated with it. This fee is defined by the Bank of Israel,  and the banks do not have to charge it.

In  the United States,  a mortgage penalty (also called prepayments) are  a negotiable part of a loan. Typically they range from two months interest to 80% of six months interest. Many times these penalties only apply if a loan is refinanced and not if the property is sold, and sometimes only during the first two years of a loan.  In the UK, it is usually a set amount defined in the loan.

The Egypitan Locust, unafraid of the mortgage penalty
The Egyptian Locust

In Israel, we rightly called this a capitalization fee and not a penalty. There is no penalty whatsoever applied, even though it feels as if there is one. Most of our existing clients have loans that aren’t subject to capitalization fees, though new clients typically do. Here is a detailed explanation of the Israeli capitalization fee that I wrote a few years ago, including links to the regulation and calculation of the fee. (You can see the mortgage page of Bank of Israel’s bank supervision section for official explanations).

We have seen cases in the past where clients are apprehensive to pay this fee. As these fees can at times reach hundreds of thousands of shekels, their apprehension is understandable. Should the fee prevent you from refinancing?

In most cases it should not. Right now rates are fantastic, and if the chances that you are going  to move in the next ten years are slim, then you should reconsider refinancing,  regardless of how scary the capitalization fee sounds. In most cases the capitalization fee is only a portion of the money that you have already contracted to pay the bank. By incorporating this fee into a new mortgage with better terms, we can usually shorten the amount of time remaining on your mortgage. If you can add a few hundred shekels per month to the amount you pay the bank each month, most people should expect to save hundreds of thousands.

If you want us to check the status of your loan, please call your bank, request a pay-off report
(דו”ח יתרת תשלומים לסילוק משכנתא) and send it to us.

Don’t fear the mortgage penalty,  embrace. It heralds tremendous potential savings for you.