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Introduction to Mortgages for the Foreign Buyer

This aim of this article is to provide basic details for our foreign buyers who may need to take a mortgage in Israel in order to purchase their home in Jerusalem. Fortunately, many of our overseas clients have the ability to purchase homes in Israel without acquiring a mortgage. For the rest of us, there is the option of taking a mortgage with an Israeli bank. North American banks do not generally agree to provide mortgages for properties overseas, so foreign buyers are more often than not dependent on Israeli banks for funding.

There are many mortgage options offered by the various banks, and it is important to understand these options in order to select the loan that best fits your financial profile. Most banks allow for mortgages of between 60-70%. Here is a list of the most common mortgage options available:

Shekel Mortgages:

Linked to the Prime rate: One of the common options is to set up payments linked to the Bank of Israel’s prime rate. Payments vary throughout the life of the mortgage as the prime rate fluctuates. The maximum mortgage period is 30 years.

Linked to the Madad (cost of living index):  At the end of each month or quarter your outstanding principle is adjusted to reflect the cost of living index.  Typically the cost of living index increases by 2% a year – which implies that your outstanding principle and your payments will increase in a similar proportion.  While this can be the most tempting option because of the inexpensive up-front payments, in the long run, the overall cost of the loan can be significantly higher than a mortgage linked to the prime rate.

Fixed Rate: Mortgages as a fixed interest rate linked to the cost of living index. Although these mortgages guarantee the payment for the duration of the loan, they can sometimes have significant penalties in the event that the mortgage holder prepays the mortgage.

Foreign Exchange Mortgages:

There are mortgages in many foreign currencies such as Dollars, Sterling, Euro, Swiss Franc or the Japanese Yen. The interest rate is based on the LIBOR (London Inter Bank Offered Rate) of that currency plus a fixed premium. Many homeowners choose a foreign currency mortgage that parallels the currency in which they are earning their income in order to ‘hedge’ themselves against currency fluctuations. For example: A US Dollar income earner might choose a US Dollar mortgage in order to avoid the impact of a depreciating US Dollar. Other homeowners choose foreign currency mortgages because of more competitive interest rates. Taking out a loan in a currency other than the currency of one’s income involves exposure to currency risk and should only be undertaken in consultation with a qualified professional.

Mortgage details to look for:

Length of Repayment – The predominate term for mortgages in Israel is 20 years.  If you want your mortgage amortized over a longer period of time, make sure and stipulate that to the Mortgage Broker or Banker that you are working with. Approval for buyers over the age of 70 will require a shorter repayment term unless the buyers take on a co-signer  for the loan who is under the age of 50(such as a sibling or child).

Pre-qualification – It’s advisable to get pre-qualified for your Israeli mortgage before you begin a serious apartment search. Getting pre-qualified avoids unnecessary disappointment that could happen if one finds a suitable home and only then discovers that the bank will not grant the amount of money needed to complete the purchase. Also, buyers with a pre-qualification are stronger buyer-candidates in the seller’s eyes. Getting pre-qualified for a mortgage is a very simple process and generally takes only 24 hours if you have the necessary personal financial details available. It is important when beginning your real estate search to have your financial situation in order so that the purchase process can go ahead smoothly without any bumps or surprises along the way.

 

Where to Begin

Understanding the terms and conditions of each loan product offered by Israeli banks is essential to ensure that you are getting the option that best suits your financial needs. Small differences in rates and terms can have a comparatively large effect on the overall cost of borrowing. It is best to compare a few loan options and negotiate with the banks on the rates and terms before deciding on any loan. We often refer our clients to mortgage brokers who are often able to negotiate a more attractive package than a client could achieve on his or her own. We hope that this information will be helpful in preparing yourself for your upcoming home purchase.

 

Credit to Mortgage Israel Ltd for information used in this article. Mortgage Israel Ltd is a consulting firm specializing in securing commercial and residential loans primarily for the Anglo market in Israel.