Home-financing in Israel: What are the mortgage options available and is there such thing as a fixed-rate?
Posted on 11. Jan, 2010 by buyitinisrael in Mortgages
By Avner Buntman
©iStockphoto.com/Golkin Oleg
Almost all mortgages in Israel are variable-rate loans linked to either the LIBOR rate, inflation rate or some other index. However, there are some banks that offer a completely fixed mortgage, where the payments will not change over the life of the loan. These mortgages are usually for a maximum of 20 years and are at significantly higher interest rates than the variable loans on offer. The following is a brief summary of some of the most common mortgage options available to finance your real estate in Israel:
1. Prime rate loan is a shekel-denominated loan based on (i.e. linked to) the Bank of Israel ‘prime rate’. Monthly repayments will vary any time the Bank of Israel adjusts its bench mark interest rate, as a means to affect monetary policy. The prime rate is 1.5 basis points above the Bank of Israel rate. Banks price their prime rate loans depending on the applicants financial standing and will quote clients a range of interest rates for this loan, for example “prime rate minus 0.5%”. A prime rate mortgage has no prepayment penalty, but may have other restrictions, when making an early repayment.
2. Madad Loans are linked to the cost of living index or C.P.I (known in Israel as the ‘Madad’), and will adjust monthly, based on the published inflation rate. There are a number of varying lengths that a person can choose to “lock” in an interest rate on this loan. Keep in mind that while a bank may offer a “30-year fixed loan”, fixed applies only to the actual interest rate, however the loan payment (and principal) will be adjusted for inflation. Banks offer this loan in a variety of periods, anywhere from a variable monthly interest rate up to a 30-year term.
3. Dollar- or Euro-Linked Mortgage is a shekel mortgage linked to the dollar rate for a period of up to 30 years. The currency of loan and repayment is in shekels according to the exchange rate on the day of repayment. The mortgage’s interest is the currency LIBOR rate plus a fixed premium set by the bank. These loans usually have no prepayment penalty, but can have other restrictions when making an early repayment.
4. Foreign Currency Mortgage is available in a number of the major currencies, including USD, Euro, Sterling, Swiss Francs, Yen and Canadian Dollars. The mortgage’s interest is the currencies LIBOR rate plus a fixed premium set by the bank. These mortgages are generally available up to 20 years and the monthly repayment is in the currency that was borrowed. This type of loan can help to offset any currency risk for borrowers who earn in the currency of loan.
5. Bridge Loan and Interest-Only Loan are usually extended to borrowers who own an apartment, for purchasing a property in the interim period until their previous apartment is sold. The bridge loan is a short-term loan for a period of up to two years. Interest only loans can be offered up to 10 years and can be refinanced into a regular loan if the borrowers decide they would like to begin paying off principal at some future date.
The above is a brief summary of some of the most popular mortgage options available from the banks in Israel. Each mortgage is designed and suitable to a particular client depending on a number of financial and personal factors. When selecting a mortgage, it is important that a person knows exactly what type of variable loan they are choosing and understands how the interest rate is calculated.
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The writer is the Founder and CEO of Mortage Israel, a private mortgage consulting firm in Israel. He can be reached by telephone at +972 2624-0299 or by email at abuntman@mortgageisrael.com.
The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals before entering into any transaction.
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