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Nov 28, 2022

freezing mortgage rates

MK Moshe Gafni (UTJ), head of the Knesset Finance Committee, announced his plan to look into the possibility of passing a law that would freeze the interest rates on mortgages - if the Bank of Israel will raise interest rates, it would raise them for the general market but the rates on mortgages would stay the same.

I am not a big maven in economics so correct me if I am wrong, but I see a few problems with this. It seems to be a populist statement that will win him some points with his constituents, but in reality wont actually help and might actually hurt.

The purpose of raising the interest rates is to curb inflation. That is what the Bank of Israel has been doing the past several months. Higher interest rates means less lending and borrowing, less spending, forcing prices to go down. If interest rates on mortgages are frozen, the increase in interest rates will be almost meaningless (at least in the housing market) and prices will keep rising.

Additionally, freezing the interest rates means banks wont be able to make money (or, as much money) on their loans. They are going to just sit by and let that happen - they will change their lending terms. They will simply stop lending with variable rates. Instead of offering variable rates that won't be able to be adjusted with the interest rates because of Gafni's law, they will offer only fixed rate loans at higher rates to cover themselves, and inflation-linked loans. People wont benefit from variable rate mortgages because banks will stop offering them, or will only offer them in a limited way. 

What do you think? will such a law freezing mortgage interest rates help people buy homes and pay off their mortgages or will it hurt the buyers and the general market?

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1 comment:

  1. You are 100% correct.

    Housing is the biggest purchase most people make in their lives. Housing prices are a significant factor in calculating inflation rates. It is not just homeowners. Housing prices affect prices in the rental market.

    Flexible mortgage rates are significantly lower than fixed mortgage rates. That is because they are less risky for the lender. The extra risk of long term rates is built into the interest rate offered.

    While this plan, may help some existing home owners in the short term, in the long run it is likely to damage the real estate market.


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