Mortgage in Israel: Complete Guide

1. Key Distinctions

Tamhil

Unlike the conventional approach of a single loan found in the United States and other countries, mortgages in Israel consist of multiple smaller loans, each with different interest rates and terms. This combination of loans is referred to as "Tamhil," and you have the flexibility to choose from various routes within this framework. We will explore these routes in more detail later on.

No interest deduction

In contrast to certain countries, Israel does not offer a mortgage interest deduction, even for self-employed individuals who work from home.

Age restrictions

Typically, borrowers are required to fully repay their mortgage by the age of 80-85.

2. Loan Amount

Israeli residents purchasing their primary property can be granted a maximum loan-to-value (LTV) ratio of 75%. For additional properties, the maximum LTV ratio is 50%. Non-Israeli residents, on the other hand, can obtain a maximum LTV ratio of 50%. Additionally, banks typically allow monthly repayments of up to 35-40% of your monthly income or debt-to-income ratio (DTI).  

3. Applying for a Mortgage

To initiate the mortgage application process in Israel, you must provide the necessary documentation required by the bank, depending on your status and country of origin. These documents typically include:

• Mortgage application form (filled and signed)
• Identification document (Israeli or foreign)
• Bank statements from all checking accounts 
• Credit score
• Income verification (payslips, income tax return, or annual income summary)

4. Interest Rates and Tamhil

Israeli banks offer a wide range of loans, each with distinct interest rates and characteristics. Here are some notable options:

Prime interest

This route is not tied to the consumer price index or any other index, ensuring that the fund balance remains constant and only decreases over time. It is suitable for individuals concerned about high inflation. However, there is a high risk involved, as a significant increase in the prime interest rate would also lead to a surge in repayment payments, as it happened in 2022-2023 when the prime rate went up to 6.25%.

One of the advantages of this route is the ability to repay the loan at any time without incurring early repayment fees. This option is particularly favorable when the prevailing interest rate in the economy is low.

CPI-linked fixed interest rates

Under this option, the mortgage rate is linked to the consumer price index, offering a fixed and known interest rate that remains unchanged. This route is especially beneficial during periods of low-interest rates. With fixed interest rates, borrowers can enjoy a sense of security and stability, as their monthly payments remain fixed, along with the linkage differences. The risk associated with this route is considered moderate, and the mortgage contract usually defines exit points where the loan can be repaid without substantial penalties. If repayment occurs outside of these exit points, a penalty may apply, but it is typically not substantial.

Unlinked fixed interest rate

An unlinked fixed-interest loan provides borrowers with stability and security, as the amount of the monthly repayment is predetermined and unaffected by changes in interest rates or inflation. While this route offers a fixed monthly payment, shielding borrowers from fluctuations, the higher interest rate it carries is a significant disadvantage. Additionally, a penalty must be paid if the loan is repaid before its termination.

CPI-linked interest at variable interest rates

This interest rate option is characterized by two variables: the interest from a specific year (typically once every five years), which is also linked to the consumer price index. The loan can be repaid at predetermined exit points, and a small fee may be required if the loan is repaid at other times.

Interest linked to foreign currency

This loan option is not tied to the consumer price index and can be repaid at any given moment. The interest rate varies based on the chosen route, usually adjusted every three to twelve months. This type of loan is suitable for individuals whose income is received in the currency to which the interest rate is linked. However, it carries a significant risk in the event of unfavorable exchange rate fluctuations.

As evident, each route comes with varying levels of risk. To mitigate risks and enable borrowers to repay different loans without substantial penalties, it is advisable to combine at least three routes. Seeking professional advice or thoroughly researching the different routes is crucial for proper planning of your mortgage Tamhil.

5. Getting Preapproved – Ishur Ekroni.

Once you have determined your desired Tamhil structure, the bank will provide you with an "ishur ekroni" - a general loan approval. This approval remains valid for 45-90 days, depending on the bank, while the interest rates remain applicable for 24-32 days. If there are no changes or delays, the ishur ekroni can be extended. However, certain circumstances may require the submission of additional documents.

Obtaining the ishur ekroni before finding a property allows you to precisely determine your budget based on the approved loan amount.

6. Finding Property

The primary avenue for finding properties in Israel is through online platforms; however, navigating these platforms can be challenging without Hebrew language proficiency. In such cases, hiring a real estate agent can significantly ease the process and ensure a smoother experience.

7. Appraisal

Once you have identified a suitable property, the bank will require a professional appraisal conducted by an appraiser from its approved list. The appraisal fee typically ranges from NIS 500-1000, depending on the property type.

In some instances, the borrower may be exempted from providing an appraisal, such as when purchasing a new project from a contractor associated with the lending bank or when seeking a low financing percentage.

It is important to note that when financing up to 75% of the property value and budget is a concern, obtaining an appraisal before signing the contract is recommended. The bank will only finance 75% of the appraised amount (not the agreed price), and if the appraisal falls below the agreed price, the borrower must cover the difference.

Furthermore, any deviations from the property's original state are not considered during the appraisal, and the cost of restoring the property is deducted. If there are significant deviations, the bank may refuse to finance the transaction.

8. Finalizing the Loan

Once the purchase contract is signed, you should submit it to the bank to initiate the loan process. The bank typically charges a fee of 0.25% of the loan amount, with a minimum fee of NIS 500. Some banks may have a maximum fee of around NIS 5,000-10,000. After a few days, the bank will notify you that the mortgage contract is ready for signature.

9. Mortgage Insurance

Upon signing the mortgage contract, it is mandatory to obtain mortgage insurance, including life and property insurance. The premium for this insurance is generally affordable, often amounting to a few hundred shekels per month.

Mortgage Broker

While you may consider handling the mortgage process independently to avoid paying a broker's fee, it is essential to assess whether it is worth the added hassle. Ask yourself if you understand the intricacies of the Tamhil structure or if you are willing to invest the time to learn. Additionally, consider if you can secure the best interest rates on your own. If you answer "No" or "Not sure" to any of these questions, it is wise to engage the services of a mortgage broker. The fee for a broker's services can range from NIS 5,000 for basic assistance to 1% of the loan amount for comprehensive service, depending on the broker and the complexity of your case. However, a professional broker can potentially save you tens or even hundreds of thousands of shekels in the long run.

Conclusion

Obtaining a mortgage in Israel is a complex process compared to other countries and requires substantial learning and effort. To save time and money, it is recommended to hire a professional mortgage broker. If you are uncertain whether you need a broker, you can first obtain the ishur ekroni independently and then consult a broker to assess if they can improve your loan terms.

If you have any questions about mortgages in Israel or finding a property in Israel, do not hesitate to contact Sabras, where our team can assist you in securing the best possible deal.