Change in early repayment fee calculation method

When refinancing a mortgage, the bank charges three types of early repayment fees:

1. Operating fee – The recycling operation requires effort from the bank and effort costs money. You will pay for the handling involved in early repayment of the loan. 60 shekels.
2. Non-notification fee  Let’s say you plan to deposit 100,000 shekels with the bank. The bank needs to prepare for this, for example, by attracting new borrowers to take your funds. Therefore, the bank wants you to notify it in advance of your intention to prepay your mortgage. The bank expects you to give at least 10 days’ notice before prepayment. If you do so, you will pay nothing. If you do not notify the bank in advance, you will pay one-tenth of a percent of the prepayment amount. In other words, if you paid off 200,000 shekels before the end of the loan term and did not notify the bank, you will pay 200,000 * 0.11 = 200 shekels. As mentioned Advance notice of mortgage repayment exempts you from this fee. 
3. Discount fee – This is the more significant commission. Here we are already talking about sums of tens of thousands of shekels, and more on that later in the article.

So what is this discounting fee?

You took out a mortgage, signed a legal contract with the bank that you would pay it off over 20 years, and then after 10 years you want, God forbid, to pay it off, to break the contract you signed.

In this situation, there can be two scenarios: The first is that the market interest rate is higher than the interest rate at which you took out the mortgage, meaning the bank will take the money you bring and lend it to someone else at a higher interest rate. In other words, the bank will profit from your early repayment. Unusually in the banking world, here when the bank profits, it does not charge a discounting fee (or an early repayment fee in common parlance, or an early repayment penalty in even more colloquial terms).

The second case is more interesting, as the interest rate in the economy is lower than the rate at which you took out the loan, and the money you brought to the bank will now be lent out at a lower interest rate, meaning the bank will incur a loss.

Someone has to pay for the damage caused to the bank, and that will likely be you. But keep in mind, the early repayment fee only compensates the bank On some of the damage Meaning, precisely when there's a high early repayment fee, refinancing a mortgage (early repayment and taking out a new mortgage) is likely to be particularly worthwhile.

After that lengthy introduction, we’ve finally gotten to the point. As mentioned, the prepayment penalty is based on the difference between the mortgage interest rate and the current market rate. In other words, risky borrowers, those who were unaware, and those who trusted the officials ("You got an excellent interest rate; luckily, the district manager isn’t on vacation and approved it") took out mortgages at exceptionally high interest rates in the past and are therefore subject to high fees today. A fee of 50,000 shekels, for example, is not unusual and reflects a massive drop in interest rates (for instance, from an index-linked loan at 5.51% to an index-linked loan at 1.51%).

Bank of Israel has determined that starting from mid-February 2015, this fee will be calculated in a way that will slightly ease the burden on borrowers who took out a mortgage at an interest rate higher than the average interest rate at that time. From the moment the regulation comes into effect, as mentioned in February, the fee will be calculated based on the difference between the mortgage interest rate or the average interest rate in the month the mortgage was taken out, whichever is lower, and the average interest rate at the time of loan repayment.

In other words, borrowers who previously took out a mortgage at a high interest rate above the average rate will have their loan calculated according to the average rate, and thus it will be smaller.

Something small added, want to know what the average mortgage interest rate is, or in other words, how effective your negotiation was? The Bank of Israel publishes the average interest rates for each track. Click here for the average interest rate on a linked loan Oh Here for the average interest rate on a non-linked loan.