When we go to get a loan from our bank, regardless of whether it is a loan for the purchase of real property (mortgage) or any other loan, we will almost always be confronted with the dilemma of the type of interest with which we will get the loan.
Written by Eitan Eldar
The disadvantages of fixed interest
When we choose a fixed interest (attached or not attached to an index), it is interest that is significantly higher than any other interest at the time of the original loan issue. Worse than that, often we will have to pay high fees due to the difference in interest, if we choose to pay it off earlier than expected and take another loan instead of it with lower interest.
When is it still worthwhile to choose a fixed interest?
1. If you need peace of mind – with all the disadvantages of fixed interest, loans with fixed interest are still the most secure loans that exist and we don’t need to worry that we will wake up one day and learn that the monthly payment of the loan has jumped significantly. The annual average rise in the index (2% in the last two years) is not so high in comparison to the possible rise in the prime interest rate or the average interest rate in the market.
2. During times of high inflation – due to the fact that during times of high inflation the price index and the various interest rates in the market rise, it makes a great deal of sense to get a high-interest loan, with the knowledge that it is reasonable to assume that in a short period of time the interest on variable interest rate loans will rise as well to the same level. This is especially true for long term loans for which there is a cumulative effect of compound interest.
3. If you have taken a long term loan – the more time passes, the greater the chance that the difference between the interest rate at the time which you took the original loan and the current interest rate will increase. There are two sides to every coin, and just as the variable interest rate can decrease significantly, it can also increase and also greatly increase the monthly payment. For this reason, particularly for long term loans, it is worth considering receiving the majority of the loan at a fixed interest rate (regarding mortgages, the Bank of Israel requires this in any event).
Despite the fact that in many cases it appears that taking a fixed interest rate loan will cause us to pay more, a fixed interest also has a substantial number of advantages that are worthwhile to take into account before making a final decision that can influence our financial situation for many years to come.
Eitan Eldar is an independent entrepreneur who has amassed assets and controlled the holdings for a number of companies over the years. He has led to cooperation, large purchases and the public stock offering of many companies on the Tel Aviv Stock Exchange. This material is taken from a collection of lectures that Eitan Eldar has presented at the Interdisciplinary Center of Herzliya.