Let’s start by understanding what a “mortgage” is? A mortgage is a lien on real estate property as collateral for the repayment of a loan. The loan for which the mortgage is granted is usually a large, long-term loan, the purpose of which is usually the purchase or expensive renovation of a property that will itself be pledged as collateral.
Since this is a loan of very large sums and a pledge of property that may be a person’s only place of residence, the Bank of Israel set 4 restrictions as a condition for granting mortgages to borrowers (for details of restrictions on granting housing loans by the Bank of Israel):
- Financing rate – the percentage of the value of the purchased property that can be taken as a loan shall not exceed: 75% – for the purchase of a single residential apartment, 70% – for the purchase of an alternative apartment and 50% for the purchase of an investment apartment.
- Monthly repayment rate – The monthly repayment rate relative to monthly income shall not exceed 50%.
- Floating Rate Part – The ratio between the portion of the loan granted in the track called “floating interest” and the total loan shall not exceed 66%.
- Loan term – A loan will not be granted for a period exceeding 30 years.
Things to know before taking out a mortgage
- You do not have to open an active account at the bank where you take the mortgage. You can take out a mortgage at one bank and have an active current account at another.
- One of the first terms mortgage bankers will be interested in is “equity.” This is the amount you have for the purchase of the property. In order for you to take out a mortgage, it must be at least 25% of the value of the purchased property. Buying a property worth NIS 1 million? You will not be able to take out a mortgage if your equity is less than NIS 250,000. Don’t be tempted to take a loan from a nonbank entity in order to supplement your equity. Such a loan will weigh heavily on you. It is better to buy a cheaper property or keep saving until you have the necessary amount.
- Before taking out the mortgage, conduct market research. Get offers from at least two banks. Understand the key details of the proposals and consult a professional if you are undecided.
- You can get mortgage advice from an independent consultant who will charge you a fee. You can also get advice at the bank, free of charge. Mortgage advisers will try to tailor a loan track according to your abilities. The consultants and the bank have no interest in offering a loan package that will lead you to default, that is, to a situation in which you will not be able to meet the monthly repayments of the mortgage.
- The bank’s approach to the mortgage is different whether it is the purchase of a first apartment or an investment apartment. While when purchasing a single apartment, the financing rate of the loan will not exceed 75% of the value of the property, when purchasing the apartment for investment, the financing rate will be no more than 50% of the value of the property.
The main considerations that need to be in mind:
- A common recommendation that takes into account living costs is to take out a mortgage in which the monthly repayment will not exceed 20%-25% of the net monthly salary. This is despite the fact that the Bank of Israel’s limit is 50 percent of income.
- Additional parameters for consideration of increasing the amount of the monthly charge relative to wages are the age of the borrowers, profession or occupation, whether there is a potential for significant increase in income in the near future.
If you have already decided to purchase a property and take out a mortgage, come prepared:
When scheduling an appointment at the bank, it is worth asking what documents are needed. Bring all the necessary documents: a purchase contract drafted from the taboo, salary slips of the last three consecutive months, ID cards.
- At the meeting, you will also be asked what your seniority is at work, what salary and bonuses you receive. This information will help the advisor tailor the right loan package for you.
- The mortgage loan is usually a commitment to a period of life in which the couple works for a living. Do not commit to mortgage payments after retirement age.
Keep in mind that this is probably the biggest deal you will make in your life and use your best judgment. It is better to live in a smaller apartment than to be under financial pressure for many years. When it is profitable, you can always sell the property and purchase a larger property.