While many aspects of the mortgage offerings, requirements and regulations are similar to other Western economies, there are several aspects of the Israeli mortgage landscape that are significantly different and the following is a review of some of the major distinctions.
There are seven topics I would like to cover here:
1. Pre-payment penalties
One of the most glaring and, to many, most annoying differences in the Israeli mortgages market is that prepayment penalties are a part of the mortgage agreement. The penalty is assessed in the event the prevailing rate at the time of prepayment is lower than the rate at the time of the mortgage funding.
Basically, the bank calculates the loss of interest that they are incurring because they can only lend out the prepaid funds at a lower interest rate.
Bank of Israel regulations require that banks discount this fee by 20% after 3 years and 30% after 5 years.
Prepayment penalties are only applicable on loans that are fixed for more than 1 year. So, a Prime based or a 3 month adjustable loan would never incur prepayment penalties.
2. Loan-to-Value restrictions
In many countries, it is possible to get a mortgage on a property for 80% and more of the property value. From this perspective, Israeli loan-to-value limitations are rather restrictive.
Generally speaking, Israeli residents buying their only property can obtain financing of up to 75% of the property value. However, non-Israeli residents and foreigners are limited to financing 50% of the property value. Israeli citizens living abroad are eligible for up to 75% financing as well – buying their only property in Israel.
The intention of these restrictive regulations is to limit purchasing of property for investment purposes, with the goal of making more properties available to first-time home buyers.
There are some work-arounds available, such as unsecured loans of an additional 10% and purchasing the property as a qualified business for up to 70% loan-to-value. These options are more expensive than conventional mortgages – but are often worthwhile to consider.
3. Ability to Combine Mortgage Products
In Israel, as opposed to many large developed economies, there is no mortgage backed securities market. Therefore, the bank that issues a mortgage, keeps that mortgage in their portfolio until it is paid off.
While there are many reasons why a mortgage backed securities market is beneficial to the lenders and borrowers alike, there is (at least) one benefit to the fact that banks retain mortgages in their portfolio; it gives them the ability to offer a large variety of mortgage products on a single property.
The ability to mix and match mortgage products gives borrowers the opportunity to “hedge their bets” if they are uncomfortable with taking the entire mortgage as a single product.
For instance, fixed rate mortgages are currently available at significantly lower rates than mortgages based on the Prime rate. Taking a fixed rate mortgage may currently provide the lowest rataes – but taking a portion of the loan based on the prime rate may lead to lower interest costs over the life of the mortgage.
Borrowers who take fixed rate mortgage may lock into rates that are currently better than prime based options, although it may turn out to be a “less than prime” option going forward (pun intended).
Another benefit of having a mix of products available is that borrowers can sometimes use is it to their advantage in their negotiations with the banks.
For instance, we discussed prepayment penalties. If a borrower knows that they will be able to pay off a portion of their loan in the near future, they can structure their loan products to minimize the risk of prepayment penalties.
4. Age Limitations
While it may not seem politically correct, the fact is that Israeli banks do discriminate in terms of age when considering mortgage approvals.
Ideally, the banks would like to limit the term of a mortgage to be paid off by the time the borrowers are age 80. Under circumstances, the approval can get extended to age 85 and even 90.
5. Life Insurance Requirements
As a general rule, bank approvals will automatically include the requirement for all borrowers and cosigners to arrange a life insurance policy which covers the principal balance of the mortgage.
In the first several years of the policy, the premiums will rise – as the principal being paid down is rather small and the borrower’s age is rising. In the later stages of the mortgage, when principal is decreasing at a faster pace, premiums will start to fall.
Nevertheless, when the borrower is older, starting in their 40’s the cost of life insurance can be significant. We can get a waiver for life insurance in many cases. Recently I had a client who was in their late 60’s with 15 years left on their mortgage. The interest rates were ok, but the life insurance premiums were becoming untenable.
We were able to refinance his mortgage, getter better rates AND getting a waiver on life insurance!
6. Mortgage Contingency Clauses
In many countries, it is common for purchase contracts to have mortgage contingency clauses. This clause gives the buyer several weeks after the signing of the contract to secure a mortgage to finance the purchase. If the buyer is unable to secure a mortgage, they are able to walk away from the contract without any penalty.
In Israel, mortgage contingency clauses are virtually unheard of. This means that buyers must have financing in place BEFORE they sign any purchase contract – otherwise they could be subject to penalties for breach of contract.
7. Underwriting Requirements
In countries that have a mortgage backed securities market, there are very strict requirements covering mortgage approvals – in order to allow the banks to resell the mortgages into the secondary market.
While Israel does have basic eligibility requirements set by the Bank of Israel – such as maximum loan-to-value and minimum income requirements, most other eligibility criteria are set by the individual banks – which allows borrowers the ability to work with different banks if their file is complicated. It might not pass one bank’s guidelines – but may be perfectly acceptable to a different bank.
After we receive a client’s application, we review it to ascertain which banks would the most advantageous to meet the client’s needs.
The author, Norman Shapiro, lives in Israel and is available for consultations during regular business hours in Israel as well as evenings to accommodate foreign clients. He may be reached at email@example.com or you are welcome to schedule an appointment at this link.