Navigating the myriad mortgage options, rates, and tracks available to home buyers in Israel can be a daunting task. With variable, fixed, and semi-fixed rates, index linkage, and options to borrow in different currencies, it’s no wonder that Anglo borrowers may find themselves feeling perplexed, especially if they’re accustomed to different systems in their home countries.
In this article, we aim to demystify the landscape of mortgage options in Israel, providing a clear explanation of each available option and helping readers grasp the intricacies of rates and tracks offered. It’s important to note that not all loan tracks are universally available to every buyer, as pre-approval is contingent upon lending regulations and individual circumstances.
Introduction to Mortgages in Israel
In Israel, all loan tracks are typically offered for a maximum term of 30 years, provided the loan is settled before the borrower reaches the age of 85. Unlike in many other countries, it’s customary in Israel to divide mortgages into various loan tracks, allowing borrowers to spread risk among different options for added flexibility and security.
The Main Mortgage Tracks
Prime Rate:
The Prime rate, also known as the variable lending rate for shekels, is determined by the Bank of Israel and is typically reassessed on the last Monday of each month. Banks quote variable rates to borrowers based on the prime rate, for instance, ‘Prime minus 0.5%.’ At present, the Prime rate stands at 6%, so ‘Prime minus 0.5%’ is 5.5%. Notably, there are no penalties for early repayments on a prime-rate mortgage.
Semi-Fixed Rate (Mishtana):
In this track, the interest rate remains fixed for predetermined intervals, often every 2, 3, or 5 years. The interest rate comprises an anchored base rate (Ogen) determined by bond market conditions, plus the bank’s profit margin. For example, currently, a 5-year semi-fixed loan may be offered at Ogen (3.7%) plus 1.1%, totaling 4.8%. Every 5 years, the bank revises the interest rate for the subsequent period based on the prevailing Ogen rate, adding a 1.1% profit margin. Borrowers can repay the loan at the end of each fixed period without penalty, though prepayments midway through the 5 years may incur penalties.
Fully Fixed Rate:
In this track, the interest rate remains constant throughout the loan term, offering stability and predictability with fixed monthly repayments. However, prepayments during periods of lower average rates may result in significant penalties. According to Bank of Israel regulations, at least 33% of the total loan amount must be on a fully fixed track. Presently, fixed rates hover around 5%.
Index-linked Mortgages and the Madad:
A madad loan links the amount borrowed to the Israeli Cost of Living Index (CPI), adjusting monthly based on the inflation rate. While the interest rates on madad loans are lower initially, long-term costs increase due to index linkage, resulting in higher monthly repayments over time. Madad loans are advisable for borrowers with high initial monthly repayments relative to income, or those seeking short-term financing.
Foreign Currency Loans:
Israeli banks offer loans in US dollars, or Euros, with some providing options in additional currencies like British Pounds or Swiss Francs. Typically, foreign currency loans feature variable interest rates based on the Specific Overnight Financing Rate (SOFR), though fixed-rate options for up to 10 years may be available. Repayments are usually made in shekels according to the exchange rate on the day of payment, making this option beneficial for those with foreign income.
Bridge Loans:
Designed for homeowners needing short-term, interest-only financing before selling their existing property, bridge loans are available for 1-5 years. In certain cases, interest repayments can be deferred until the loan term’s end or extended to 10 years.
Interest-Only Loans:
While interest-only loans are generally uncommon in Israel, an introductory interest-only period may be available, transitioning to capital repayment thereafter. This option can be advantageous, particularly for minimizing initial mortgage repayments when purchasing from a contractor and paying rent or another mortgage during the construction phase.
In conclusion, the mortgage landscape in Israel offers a diverse array of options tailored to individual needs and circumstances. It’s crucial for borrowers to carefully assess their financial situation and consult with mortgage experts to learn about current mortgage rates and find the most suitable solution.
Aaron Krasner is a private mortgage consultant in Israel and is the owner of Anglo Mortgages. Aaron can be reached by email at [email protected].
