Guest Contributor: Moshe Wilshinsky
What to Expect
While home financing in Israel carries some similarities with the US, there are a number of important differences you should be aware of when getting a mortgage in Israel. Here are five tips from a Mortgage industry veteran with a quarter century of experience who has worked both in the US and Israeli markets.
Full Service vs. Self-Service
In the US, most lenders handle the entire mortgage process for you from appraising the property to title searches and handling the registration of the lien in public records. In Israel, it’s more self-service, so prepare to do a lot of running around, ask a lot of questions, and be careful.
Disclosure vs. Discovery
In the US, there are numerous mortgage regulations, such as “Truth in Lending” and its “Regulation Z,” and RESPA (the Real Estate Settlement Procedures Act). These regulations try to protect consumers, by mandating Lenders Disclose as much information as possible. In Israel, however, consumer disclosure regulations are minimal. For example, how adjustable rates adjust and how high rates can go (read about the lack of “Rate Caps” below) or the fact that there are some loans in Israel called “Fixed Rate” loans that actually adjust every month (see explanation for Real vs Nominal interest rates below). These are just a couple of examples, so be sure you understand what you’re getting into.
What You See vs. What You Get
The types of loans available in Israel are similar to those in the US and even Canada and the UK, but there are also subtle but major differences. For example, the US offers fixed-rate loans, where the interest rate remains the same throughout the life of the loan, in nominal terms whereas Israeli fixed-rate loans are often in real terms. A real interest rate means that the actual interest you pay on your mortgage is the contractual rate plus inflation, whereas a nominal rate means you pay the contractual rate and no more.
Vanilla vs. a Portfolio of Thirty-One Flavors
Despite requiring more work and diligence, Israel offers borrowers opportunities that don’t exist in the US. For instance, in the US, you select a type of mortgage-e.g., fixed or adjustable (and, for that matter, on what basis it’s adjusted)—but every dollar you borrow is subject to the same loan terms. By contrast, in Israel your mortgage can be made up of smaller mortgages with different terms, but with one consolidated payment. For example, if you borrow $300,000, every $60,000 can have different types of interest rates (e.g. fixed or adjustable), currencies, and each can be paid off separately. Think of it as the inverse of an investment portfolio – just as an investment portfolio matches your investment objectives (e.g. risk tolerance as well as income and capital appreciation requirements) so should a loan match your loan objectives. While five different sets of terms can be confusing, this arrangement provides the borrower with greater flexibility than what’s available in the US.
The Sky’s the Limit
Adjustable-rate mortgages (ARMs) are as popular in Israel as they are in the US. However, mortgage lenders in the US limit how much interest can change in a single adjustment, as well as cumulatively over the life of the loan usually referred to as “rate caps”. Israel has no such “rate caps.” It is also important to remember while rate locks for 30, 45 and even 60 days, are commonly used in the US, they do not exist in Israel.