Complete Guide to Your Mortgage in Israel
A mortgage is a fantastic way of buying a better property. It can multiply your budget by up to 4 times! You might have gotten a mortgage once or twice in your country of origin and even paid it off, and now it's time to get one in Israel. Here you will learn about the process and the difference to understand how and what to do next.
Mainly, anyone can apply for a mortgage, whether he is a resident, foreigner, or in the process of Aliyah. The difference is the rate and the amount you can borrow. Let's begin.
Tamhil
Instead of one loan as is customary in the United States and other countries, a mortgage in Israel is combined of several smaller loans, with each loan being given at a different interest rate and period. Such a combination is called Tamhil, and you can choose different routes. We will get into details later.
No interest deduction
There is no mortgage interest deduction in Israel, even self-employed who work from home.
Age restrictions
Generally, the borrower is obligated to pay off the loan fully by the age of 80-85.
2. Loan Amount
Israeli residents purchasing their only property are allowed a maximum of 75% LTV (loan to value) and 50% LTV for their additional property. Non-Israel residents are allowed a maximum of 50% LTV. In addition, banks allow a monthly repayment of up to 35-40% of your monthly income or your DTI (debt to income ratio).
To apply for a mortgage in Israel, you must provide all the documents required by the bank, according to your status and country of origin, such as:
- Mortgage application form (filled and signed)
- ID (Israeli or foreign)
- Bank statements from all checking accounts
- Credit score
- Income verification (payslips, income tax return, or annual income summary)
Banks offer a borrower a large variety of loans, and each loan has a different interest rate and characteristics.
Prime interest
This route is not linked to the consumer price index or any other index, so the fund balance does not change and only decreases over time. The route is suitable for anyone who fears high inflation; however, this is a high risk, since if the prime interest rate soars up also the repayment payments skyrocket.
A loan with a prime interest rate can be repaid at any time, without an early repayment fee, a significant advantage for this route, which is especially suitable for cases where the interest rate is low in the economy.
CPI-linked fixed interest rates
A mortgage rate linked to the consumer price index at a fixed and known interest rate that does not change. This route is especially suitable for a period with low-interest rates as is today. Fixed interest allows you to enjoy a sense of security and stability, especially a fixed monthly payment plus the linkage differences. The risk level of this route is considered medium, and every few years, you will be able to repay the loan without penalties, depending on the exit points defined in the mortgage contract. If you decide to repay the loan out of exit points, you must pay the penalty, but it is usually not high.
Unlinked fixed interest rate
An unlinked fixed interest loan gives a sense of stability and security since you know the amount of the monthly repayment in advance. The level of risk that characterizes this route is moderate since a fixed monthly repayment is paid that is not affected by changes in interest rates and changes in inflation. However, the high-interest rate that characterizes this route is considered a significant disadvantage, and a penalty must be paid if one wishes to repay the loan before its termination.
CPI-linked interest at variable interest rates
This interest rate is characterized by two variables - interest from its year (usually once every five years), which is also linked to the CPI. The loan can be repaid at pre-set exit points, and a small fine will be required if the loan is repaid at another time.
Interest linked to foreign currency
This loan is not linked to the consumer price index and can be repaid at any given moment. The interest rate varies depending on the chosen route, usually every three months to twelve months. This loan is suitable for those whose income comes in the currency to which the interest rate is linked. However, this route has a significant disadvantage as there is a great risk if the exchange rate jumps up.
As you can see, each route offers a different level of risk; therefore, it is wise to combine at least three routes to minimize risks and allow the borrower to repay various loans without high penalties. In order to plan your mortgage tamhil correctly, it is important to get professional advice or at least study the different routes in depth.
5. Getting Preapproved – Ishur Ekroni.
After assembling the tamhil, the bank gives the borrower ishur ekroni – a general approval for the loan. This approval is valid for 45-90 days (depending on the bank), and the interest rates are valid for 24-32 days. It is always possible to extend the ishur ekroni if there hasn't been any change or delay. Otherwise, the bank might again require certain documents.
You can get the ishur ekroni before finding a property and thus be more precise with your budget according to the amount you can borrow.
Properties in Israel can be found mainly on the internet; however, without knowing Hebrew, it will be hard. You may consider hiring a real estate agent and let him do the job.
7. Appraisal
Once the property is found, the bank will require appraisals of the property by an appraiser from the list of appraisers with whom the bank works. Usually, the appraisal charges NIS 500-1000, depending on the property type.
In some cases, the bank exempts the borrower from submitting an appraiser's assessment, for example, when purchasing a new project from a contractor who works with a lending bank or when requesting a low financing percentage.
Note that if the financing is 75% and your budget is tight, it is better to appraise the property before signing the contract. The bank will finance only 75% of the appraisal amount (and not of the agreed price), and if the appraisal is lower than the agreed price, you will have to add the difference.
Be careful with deviations, for they are not only not taken into account, but the cost of restoring the property to its original state is deducted from the appraisal. If the deviations are many, the bank can refuse to finance the deal.
After signing the purchase contract, take the contract to the bank and open a file. The bank requires a fee of 0.25% of the loan amount, with a minimum fee of NIS 500. Some banks have a maximum fee of about NIS 5-10k. The bank will notify you a few days later that the mortgage contract is ready for signature.
After signing the mortgage contract, you will be required to take out mortgage insurance – life and property insurance. The amount is not high and usually is no more than a few hundred shekels a month.
Reading this, you might think whether you need a mortgage broker or handle it by yourself and keep the fee. No matter how complicated the process might seem, you can do it yourself, but first ask yourself - is it worth the hassle? Do I understand the tamhil, or am I willing to learn? Can I get the best interest rates by myself? If one of the answers is "No" or "Not sure," it would be wise to take out a mortgage broker. This will cost you from NIS 5,000 for basic services to 1% of the loan for comprehensive service (depending on the broker and the difficulty of the case). Still, a professional broker will save you tens and even hundreds of thousands of shekels in the long run.
Getting a mortgage in Israel is not easy as in other counties and requires learning a lot and running around. Save your time and shekels by hiring a professional mortgage broker. If you are unsure whether you need one, you can get the ishur ekroni by yourself and then hire a broker to see if he can improve your terms.
If you have questions regarding mortgages in Israel or finding a property in Israel, feel free to contact us to promise yourself the best deal.
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