The Israeli Mortgage System: Is It Your Best Bet?

Investors, including foreign buyers, account for approximately one third of all real estate transactions in Israel, and this number if growing. If your are considering an investment in Israeli real estate, one decision you will need to make is what type of mortgage will work best for you. If you opt to have your investment financed by an Israeli lending institution, there are several advantages and disadvantages to particular financing options, as well as the Israeli mortgage system as a whole. Let’s consider a few of the differences in the Israeli mortgage system that can sometimes confound the U.S. buyer: 1. American buyers are accustomed to having lenders handle almost the entire mortgage process, including title searches and property appraisals. In Israel, however, buyers must handle most of these tasks themselves. Of course, most of these activities can be delegated to a legal representative. 2. Israel has little in the way of consumer disclosure regulations for real estate, as compared to the U.S., with its variety of regulations such as the Real Estate Settlement Procedures act. Lender disclosure is not required for such matters as how high a mortgage rate can be allowed to go. It is incumbent upon the buyer or his/her representative to practice due diligence before signing any mortgage papers. 3. Israel’s mortgage loan structure is different than that of U.S. lenders. As one example, a fixed-rate loan in the U.S. ensures that the mortgage’s interest rate remains constant. In Israel, the “fixed” rate may fluctuate according to inflation. There are also no caps placed on adjustable-rate mortgage interest rates. In the U.S., buyers also expect to lock in rates for 30 – 60 days, and this option is not available from lenders in Israel. Most mortgages will allow coverage of only 50 – 75% of the loan. In particular, absentee foreign investors can only cover 50% of the real estate cost through a mortgage with an Israeli lending institution. But there is good news as well. Israel’s mortgage system has several characteristics that may prove attractive to U.S. buyers. Here are a few: 1. Israeli mortgages generally offer more options in their loan terms. A mortgage can consist of a series of smaller mortgages, each with different terms. Buyers can opt for a combination of fixed and adjustable rates, for example. Great flexibility can be achieved, much like a diversified investment portfolio of stocks and bonds. Consider your own risk tolerance when choosing your own set of mortgage options. 2. Shekel mortgages are offered based upon the rates being linked to different variables, again offering the buyer some flexibility in options. The most common rate variables are: a. Link to cost of living index (Madad). In this method, the borrower’s outstanding principle is adjusted on a monthly basis to reflect the cost of living index. In a typical year, the cost of living index rises by about 2%. An advantage of this option is low up-front payments. The disadvantage is usually a higher overall cost of the loan b. Link to prime rate. Many mortgages are set up so that payments are linked to the prime rate for the Bank of Israel. Mortgage interest rates will fluctuate with the prime rate. The maximum period of a prime rate mortage is 30 years. c. Fixed vs. variable rates. Almost all mortgages in Israel were once inked to variable rates only. Today, many lending institutions have started to offer fixed rate loans for up to 20 years. These mortgages guarantee the payment over the duration of the loan, but can exact high penalties is the buyer prepays the mortgage. 3. Foreign exchange mortgages are another option available in Israel to overseas buyers. The mortgage is taken out in a foreign currency, such as the U.S. dollar. The interest rate is than based on the interbank offered rate of that particular currency, along with a fixed premium. Such an arrangements helps investors hedge their loan against currency fluctuations, as the mortgage currency is the same as that in which they are earning their income. However, an investor may also elect to invest in a foreign currency because the mortgage offers a more competitive interest rate. Again, the name of the game is choice. We hope it goes without saying that decisions about foreign real estate investments including the selection of the right mortgage, should only be undertaken after consultation with a professional. If you are interested in the Israeli real estate market and are prepared to ask questions and obtain proper guidance, you will find that it offers a degree of flexibility and choice that can make your investment decision worthwhile.