Chapter 9: Taking a Mortgage
When taking a mortgage, always remember that money has a price. Because banks receive interest from the Central Bank of Israel to keep cash in the safe, if a bank gives you cash in the form of a mortgage, the bank will necessarily forfeit and try to recoup the Central Bank’s interest rate and also try to make a profit. If the interest rate of the Central Bank is lower than normal, banks tend to lend more money, thereby growing the cash flow on the consumer market and causing the price of goods to increase. An increase in prices like this is called inflation and represents a risk both for you and for the bank.
In order to mitigate the risks of inflation, banks have created a variety of methodologies, configurations, and packages of mortgages for you to choose from, all of them consisting in some capacity of loan + interest. For example, a fixed rate, shekel-denominated, CPI-linked mortgage is a NIS-denominated loan in which the interest rate you pay the bank typically increases along with the loan term but is fixed from the day you take the loan, whereas the bank will adjust the remaining outstanding amount based on the official levels of inflation reported by the Bank of Israel. In general, a fixed mortgage is usually repaid at a rate that is known and agreed upon by you and the bank in advance, whereas a floating mortgage’s repayment rates are calculated by the bank on an ongoing basis during the mortgage period.
Typically, Israeli mortgage banks fund up to 75% of an apartment value. But with certain types of floating mortgage, it is sometimes possible for a loan’s value to be 100%, or even greater than the apartment value because it’s easier to consolidate expensive debt into floating rates by borrowing more.
Note that for a foreign mortgage taker, it is in theory possible to link repayment to the inflation rate of a foreign currency; in practice, though, it may often be cheaper to hedge your assets in favor of a more liquid currency such as the US Dollar.
Situations to Be Prepared For:
In our experience, the more complicated the real estate transaction, the more conditions the bank will likely impose before underwriting a mortgage. Moreover, sometimes, the initial loan authorization is not enough, and you may have to obtain additional funds from other sources in parallel. Situations may also exist in which a transaction is relatively simple, but due to a low appraisal value of the property, the bank will underwrite a lesser loan than was initially approved. For example, your potential apartment is large and attractive, but a large part of it has been built without a proper permit. In such a case, the appraiser will probably ignore the section of the apartment which has been built without a license or at least devalue it. Many banks offer mortgage baskets that combine floating and fixed loans, so when considering taking a mortgage, it is advised to speak in-depth with a mortgage bank representative and decide on a mortgage package that most appropriately represents feasibility in your financial picture, bearing in mind that it is often possible to refinance or renegotiate a mortgage in the future.