Getting a mortgage in Israel

Buying a home is a big step for any family and one that requires many financial decisions during the process, but when it comes to buying a home, not all financial decisions are created equal. In the case of buying a home, the largest, longest, and most expensive cost a family will likely need to deal with is the mortgage to finance the purchase. Although the process of attaining a mortgage in most countries is not an overly complicated one, in Israel not only can the process itself be overwhelming, but the mechanics and structure of the mortgage are substantially different in comparison to other countries. Consequently, even the smallest mistakes can cost a family tens and, in most cases, even hundreds of thousands of shekel. To avoid this, it is critical that a potential borrower be familiar with how the process works as well as having an intimate understanding of the inner workings of the mortgage market. The first step in reaching this goal is to understand some of the basic requirements necessary to be approved for a mortgage, as well as some of the basic terms that will be “thrown” at you when speaking with a mortgage bank.

Let’s start with level of financing banks in Israel are allowed to offer a potential borrower. Over the last decade, the Bank of Israel has instituted several regulations meant to lower the risk to banks as well as to potential borrowers. When related to the level of financing, which is known as the LTV (Loan To Value) ratio or ‘achuz mimun’ (percentage of financing) in Hebrew, there is a differentiation between different types of buyers. First time buyers in Israel can be offered an LTV ratio of up to 75%, buyers who are looking to sell a property they already own and buy a new property (only one property will be owned at the end of the process) can be offered a maximum LTV ratio of 70%-75% (depending on the stage of the sale) and investors who own more than one property or foreign residents buying property in Israel are limited to an LTV ratio of 50%. The above is relevant when taking a mortgage through one of the mortgage banks but in addition to the mortgage banks there is also a secondary mortgage market in Israel and through non-bank lenders there are solutions for attaining mortgages with LTV ratios as high as 85%.

Another area where strict regulations are imposed is with the ratio of the monthly payment vs. a borrower’s net (after taxes) monthly income. In Hebrew this is known as ‘yachas hechzer’ (return ratio). Although the Bank of Israel technically allows the banks to approve mortgages with a payment to income ratio as high as 50%, the maximum ratio that will be approved by a bank stands at 40%. Having said that, in general the “party line” at the banks is to keep the borrower’s initial monthly payment at around 30%-33% of their net income. Mortgages with ratios above this mark can certainly be approved but it can be more difficult and will often come at a premium. It should be noted that for most families it is not recommended to commit to a monthly payment that is higher than 20%-25% of their net monthly income but this is of course very subjective.

The final major item that the banks look at is a borrower’s credit history. In 2018 the Bank of Israel implemented a credit report similar to the credit reports used in many other countries. The standard report reviewed by a potential lender shows 3 years of credit history which includes information on any bank accounts and credit cards in the borrower’s name as well as history on loans the borrower has taken. The lenders want to see that a borrower has made payments on-time, that no checks have bounced, that no liens have been placed on their bank accounts and that they aren’t overextended in general.

Beyond the obvious goal of rewarding potential borrowers with good credit history the credit report was also meant to stop the situation where a borrower who may have had an issue in the past and turned things around would still have it follow them around even decades later. This is the reason the report only covers 3 years of history. In the case of a foreign resident or an Israeli whose income is generated and received in a foreign country, the lenders will request a credit report and credit score (where relevant) from that country.

It is also critical that a borrower understands the structure of the mortgage. In Israel a mortgage will generally be based on what is referred to as a mortgage package (‘tamhil mashkanta’). What this means is that your mortgage can be split into multiple loans or tranches which are referred to as mortgage tracks (‘maslulei mashkanta’). Practically this means that part of your mortgage can carry a fixed interest rate, part can carry a variable/ adjustable rate, a portion may be linked to a foreign currency and parts may be linked to the Israeli CPI (Cost Price Index). These mortgage tracks can also be amortized over different terms, so part of your mortgage may carry a 20-year term, part may be for 30 years and other parts may be for 5, 17 or anything in between. The tracks your mortgage package is built on are without a doubt the most important consideration a borrower must consider. The make-up of the package will also affect the interest rates the banks will offer. It is always extremely important to understand the exact differences between each track and not to be enticed by a lower rate that could vary in the future or be affected by inflation. Building the correct package is the only way to ensure your mortgage will fit your family’s needs and goals in the future.

As I’m sure you can tell from reading the above, the mortgage process in Israel is a complicated one and it has many “moving parts” that must be considered carefully. For this reason, it is highly recommended to consult with an Independent Mortgage Consultant before making any mortgage related decisions and ideally, it is recommended that you consult with a mortgage expert before you have even started looking for a home.

The writer, Eyal Abramowitz is an Independent Mortgage Consultant and Broker in Israel with more than 16 years of experience in the field and a member of the Israel Mortgage Consultants Association. Eyal is a native English speaker and he’s available for consultations. He can be reached by phone, +972-54-591-0902 or email eyal@i-m-c.co.il