When we approach the process of taking out a mortgage, most of us focus on current interest rates and monthly payment amounts. However, a mortgage is a long-term loan that sometimes spans 30 years. During this period, life changes: families grow, homeowners move to new houses, training funds are released, or we decide to refinance our mortgage to improve terms.
At these exit points, the bank may demand payment called an "early repayment fee" (or colloquially "exit penalty"). The rationale behind this fee is compensation to the bank for the loss of future profits it expected to receive from us. When the bank gave us a loan at a certain interest rate, it relied on this income stream. If we return the money earlier than expected, and interest rates in the economy have dropped in the meantime, the bank won't be able to lend this money to someone else at the same high interest rate, so it demands compensation for the difference.
The early repayment fee is not an arbitrary amount, but consists of five different components defined by the Bank of Israel.
This is the most significant and expensive component in most cases. It is calculated only if the average interest rate in the economy on the repayment date is lower than the interest rate in your original loan. The difference between the interest rates, multiplied by the number of years remaining on the loan (discounted to present value), is the amount you will pay.
If you did not notify the bank in writing at least 10 days in advance of your intention to pay off the mortgage, you will pay a fee of 0.1% of the repayment amount. This is a clause that is very easy to avoid through proper planning.
A fixed and relatively low amount (a few dozen shekels) that covers the bank's operational expenses in executing the transaction.
Relevant only for index-linked tracks. If the repayment is made between the 1st and 15th of the month (before the index publication), the bank charges half of the average index as compensation for the index increase that has not yet been published.
The best way to deal with early repayment fees is smart planning when taking the mortgage. This is where the added value of professional mortgage consulting comes into play. An experienced advisor will not only get you good interest rates, but will build a mix that takes into account your future flexibility.
There are tracks with no early repayment fee (except for a negligible operational fee), such as the prime track and foreign currency tracks. In contrast, fixed interest rate tracks (indexed or non-indexed) have the highest risk of penalties. Variable interest rate tracks include "exit stations" - predetermined dates when you can repay the loan without penalty.
Especially when it comes to first-time home mortgage consulting, young couples tend to ignore this risk. But it's precisely young couples who are expected to make many changes in the first years (moving homes, expanding family), so flexibility is critical for them.
A common question in the mortgage refinancing process is whether the move pays off when there is a high exit penalty. The answer is mathematically simple: the profitability of refinancing is measured by the total net savings.
If the savings from new interest rates over the life of the mortgage exceeds the penalty amount that needs to be paid now - refinancing pays off. Often, even with a penalty of tens of thousands of shekels, moving to cheaper tracks saves hundreds of thousands of shekels in the long run. Moreover, sometimes you can "load" the penalty onto the new mortgage (penalty capitalization), so you won't need to bring money from home.
Before you panic about the bank's notice of "exit penalty," request a settlement balance report and check the exact amount. Often you'll discover that the penalty is lower than you thought, or that the potential savings from refinancing makes it negligible.
Don't let the fine print surprise you. Ariel Achon's team is here to check your mortgage, strategically plan your tracks, and save you a lot of money on unnecessary fees.
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