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).

In summary
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.

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The pre-sale is essentially a solution that allows a developer to start a project with the aid of the bank, which can often reach millions of Shekels, through a “lending account.” Before the bank allows the release of funds for a developer, it requires them to provide private capital for a portion of the value of the construction.

The developer tries to sell the plots to the buyers, who are investing an amount that is 15-20 percent of the transactions at the signing, and get a mortgage or business loan in order to buy the real estate plots. In this way the developer shows the bank that they are selling units before the project even begins, thereby increasing the trust between the parties and can even encourage the bank to grant greater benefits.In order to grant a developer with a lending account for a real estate project, the bank is interested to see that the developer can sell the real estate plots in order to return the investment and that the project has potential. This is the reason why the bank requires them to sell a certain amount of units to buyers. This arrangement is known as “pre-sale.”

When is a project successful?

In the best scenario for a developer the real estate project is one for a financially secure population, which will attract other financially secure people and thereby secure the success of the project. The benefits that the developer earns from the bank allow the developer to offer discounts in certain cases to the buyers purchasing real estate plots in the project.

In truth the benefits are large in such situations, for the buyers as well, but it is important to remember that they don’t get to see the plots that they have begun to pay for. In a pre-sale the buyer purchases a plot (an apartment or office, for example) from the developer only on paper, and a great amount of time passes until the project is completed.

The pre-sale is often also used as a condition of the bank to begin to provide financial assistance to a project, in addition to private capital provided by the developer. In these cases the developer is required to a pre-sale of a certain percentage of the project at predetermined sale prices.

Eitan Eldar is involved in a variety of activities that include, among other things, real estate projects in Israel and abroad and financial services. In recent years, Eitan Eldar, has been a leader in investment banking deals. The information is part of lectures of Eitan Eldar in IDC Herzliya.

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